Option demand and consumer's surplus: Valuing price changes under uncertainty

Abstract

Option Value measures the maximum compensation required to guarantee that a price system will prevail in all future states of nature rather than in a single hypothetical state. When there are no contingent claim markets, Option Value may be positive, negative, or zero, depending on the preferences and circumstances of individuals. However, if there are complete contingent claim markets in which all individuals can trade claims contingent on their future incomes and tastes at actuarially fair prices, Option Value is necessarily zero and all individuals are necessarily risk-averse in equilibrium. – AI-generated abstract.