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Nowadays very liquid markets exist for "plain vanilla" options (put- and call-options) with a variety of characteristics (expirations and strike-prices).In many cases such options are much more natural hedging instruments for "exotic" options.The "official" reason is that betting markets are quite close to the idealized markets with uncertainty we usually analyze (eg.
The same authors also have a paper on complex barrier options and lookbacks.
There is a lot a papers by Paul Glasserman, Brodie & Glasserman, for instance. No such problems with the ingenious least-squares idea of Longstaff & Schwartz . It is possible to keep the thesis completely theoretical (i.e.
Their approach has created a number of "follow-up" papers, see for instance idea of this one and CAF working papers 90 and 112-3 by Lars Stentoft. no computers & numbers), but it is more natural to involve some numerical work.
This means that our usual inequalities are reversed. With many risk-loving bettors and bookbalancing bookmakers you can make your own nice "equilibrium odds curves". A paper by Hurley and Mc Donough shows transactions costs & short-selling contraints may do the trick (in parimutuel betting at least).
In an interesting series of papers (with a microeconomic approach) Hyun Song Shin shows how the bias may arise because some bettors are better informed than others ("insider trading") -- and bookmakers know that.