English

Static Arbitrage Bounds on Basket Option Prices

Optimization and Control 2008-12-10 v2 Probability Statistical Finance

Abstract

We consider the problem of computing upper and lower bounds on the price of a European basket call option, given prices on other similar baskets. Although this problem is very hard to solve exactly in the general case, we show that in some instances the upper and lower bounds can be computed via simple closed-form expressions, or linear programs. We also introduce an efficient linear programming relaxation of the general problem based on an integral transform interpretation of the call price function. We show that this relaxation is tight in some of the special cases examined before.

Keywords

Cite

@article{arxiv.math/0302243,
  title  = {Static Arbitrage Bounds on Basket Option Prices},
  author = {Alexandre d'Aspremont and Laurent El Ghaoui},
  journal= {arXiv preprint arXiv:math/0302243},
  year   = {2008}
}

Comments

To Appear in Mathematical Programming, Series A