Computing arbitrage upper bounds on basket options in the presence of bid–ask spreads

Javier Peña, Juan C. Vera and Luis F. Zuluaga

European Journal of Operational Research, 2012, vol. 222, issue 2, 369-376

Abstract: We study the problem of computing the sharpest static-arbitrage upper bound on the price of a European basket option, given the bid–ask prices of vanilla call options in the underlying securities. We show that this semi-infinite problem can be recast as a linear program whose size is linear in the input data size. These developments advance previous related results, and enhance the practical value of static-arbitrage bounds as a pricing technique by taking into account the presence of bid–ask spreads. We illustrate our results by computing upper bounds on the price of a DJX basket option. The MATLAB code used to compute these bounds is available online at www.andrew.cmu.edu/user/jfp/arbitragebounds.html.

Keywords: Finance; Option pricing; European options; Incomplete markets; Arbitrage bounds; Linear programming (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221712003463
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:222:y:2012:i:2:p:369-376

DOI: 10.1016/j.ejor.2012.04.035

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().