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- Title
THE RANGE OF TRADED OPTION PRICES.
- Authors
Davis, Mark H. A.; Hobson, David G.
- Abstract
Suppose we are given a set of prices of European call options over a finite range of strike prices and exercise times, written on a financial asset with deterministic dividends which is traded in a frictionless market with no interest rate volatility. We ask: when is there an arbitrage opportunity? We give conditions for the prices to be consistent with an arbitrage-free model (in which case the model can be realized on a finite probability space). We also give conditions for there to exist an arbitrage opportunity which can be locked in at time zero. There is also a third boundary case in which prices are recognizably misspecified, but the ability to take advantage of an arbitrage opportunity depends upon knowledge of the null sets of the model.
- Subjects
OPTIONS (Finance); PRICING; DIVIDENDS; MARKET volatility; ARBITRAGE
- Publication
Mathematical Finance, 2007, Vol 17, Issue 1, p1
- ISSN
0960-1627
- Publication type
Article
- DOI
10.1111/j.1467-9965.2007.00291.x