Tighter Option Bounds from Multiple Exercise Prices

Peter Ryan

Review of Derivatives Research, 2000, vol. 4, issue 2, 155-188

Abstract: Optionbounds are determined by state discount factors limited by prices of a riskless bond and the underlying asset. Usually the asset has at least two market-traded options for each maturity, further limiting the factors. Tighter bounds result from incorporating the prices of all existing options of the same maturity. The tightened bounds are particularly applicable to appraising the consistency of all options trading on a single underlying security, notably index options. Constructed examples indicate a potential improvement of eighty percent in bound width; index data reveals a lower reduction, but extensive arbitrage opportunities from violations of the tighter bounds. Copyright Kluwer Academic Publishers 2000

Keywords: contingent pricing; option pricing; option bounds; arbitrage; linear programming (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1023/A:1009642309978

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