arbitrage bounds

Closed-form solutions to static-arbitrage upper bounds on basket options

  • Javier F. Peña
  • Juan C. Vera
  • Luis F. Zuluaga
    • Categories Finance and Economics, Linear Programming Tags , ,

    We provide a closed-form solution to the problem of computing the sharpest static-arbitrage upper bound on the price of a European basket option, given the prices of vanilla call options in the underlying securities. Unlike previous approaches to this problem, our solution technique is entirely based on linear programming. This also allows us to obtain … Read more

    Static-arbitrage bounds on the prices of basket options via linear programming

  • Javier F. Peña
  • Juan Vera
  • Luis F. Zuluaga
    • Categories Applications - OR and Management Sciences, Linear Programming, Semi-infinite Programming Tags , ,

    We show that the problem of computing sharp upper and lower static-arbitrage bounds on the price of a European basket option, given the prices of other similar options, can be cast as a linear program (LP). The LP formulations readily yield super-replicating (sub-replicating) strategies for the upper (lower) bound problem. The dual counterparts of the … Read more