Derivative Strategies and Customer Orders

Chapter 2 introduced parimutuel pricing in its most basic form, a framework in which customers can only trade single state claims (no trading of vanilla options) and customers can only submit market orders (no submitting of limit orders). In this framework, pricing was based on two mathematical principles — the principle of “no-arbitrage” and the principle of “self-hedging.” Although this framework is widely used for wagering, it is not flexible enough to be useful for trading derivatives.