Static-arbitrage upper bounds for the prices of basket options |
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| Authors: | David Hobson Peter Laurence Tai-Ho Wang |
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| Institution: | 1. Department of Mathematical Sciences , University of Bath , Bath BA2 7AY, UK;2. Operations Research and Financial Engineering , Princeton University , Princeton, NJ 08544 , USA;3. Dipartimento di Matematica , Università di Roma, ‘La Sapienza’ , Piazzale Aldo Moro 2, 00185 Roma, Italia;4. Department of Mathematics , National Chung Cheng University , 160 San-Hsing, Min-Hsiung, Chia-Yi 621, Taiwan |
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| Abstract: | In this paper we investigate the possible values of basket options. Instead of postulating a model and pricing the basket option using that model, we consider the set of all models which are consistent with the observed prices of vanilla options, and, within this class, find the model for which the price of the basket option is largest. This price is an upper bound on the prices of the basket option which are consistent with no-arbitrage. In the absence of additional assumptions it is the lowest upper bound on the price of the basket option. Associated with the bound is a simple super-replicating strategy involving trading in the individual calls. |
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| Keywords: | Basket options Super-replication Arbitrage-free bounds |
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