The Range of Traded Option Prices
نویسندگان
چکیده
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 arbitragefree model (in which case the model can be realised 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 recognisably misspecified, but the ability to take advantage of an arbitrage opportunity depends upon knowledge of the null sets of the model.
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