NO-ARBITRAGE BOUNDS ON TWO ONE-TOUCH OPTIONS

Yukihiro Tsuzuki ()
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Yukihiro Tsuzuki: Graduate School of Economics, The University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo 113-0033, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 03, 1-22

Abstract: This paper investigates no arbitrage relationships between the prices of two one-touch options with the same maturity but with different barrier levels. We find the no-arbitrage range of prices for a no-touch option, given the price of a second no-touch option and the prices of co-maturing vanilla call options. The upper and lower bounds are the cost of a super-replicating portfolio and a sub-replicating portfolio respectively. These consist of call options, put options, digital options and a one-touch option. We assume that the underlying process is a continuous martingale but do not postulate a model.

Keywords: Barrier option; one-touch option; model-independent; super-replication; pricing bounds (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S0219024915500211

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