In this paper we investigate the possible values of basket options. Instead of postulating a model and pricing the basket Option using that model, we consider the set of all models which are consistent with the observed prices of vanilla options, and, within this class, find the model for which the price of the basket option is largest. This price is an upper bound on the prices of the basket option which are consistent with no-arbitrage. In the absence of additional assumptions it is the lowest upper bound on the price of the basket option. Associated with the bound is a simple super-replicating strategy involving trading in the individual calls.
Static-arbitrage upper bounds for the prices of basket options / Laurence, Peter Michael; P., Laurence; P. M., Wang; Th,. - In: QUANTITATIVE FINANCE. - ISSN 1469-7688. - 5:4(2005), pp. 329-342. [10.1080/14697680500151392]
Static-arbitrage upper bounds for the prices of basket options
LAURENCE, Peter Michael;
2005
Abstract
In this paper we investigate the possible values of basket options. Instead of postulating a model and pricing the basket Option using that model, we consider the set of all models which are consistent with the observed prices of vanilla options, and, within this class, find the model for which the price of the basket option is largest. This price is an upper bound on the prices of the basket option which are consistent with no-arbitrage. In the absence of additional assumptions it is the lowest upper bound on the price of the basket option. Associated with the bound is a simple super-replicating strategy involving trading in the individual calls.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.