Davis, Mark H. A. and Hobson, David G.. (2007) The range of traded option prices. MATHEMATICAL FINANCE, 17 (1). pp. 1-14. ISSN 0960-1627

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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.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions Q Science > QA Mathematics H Social Sciences
Journal or Publication Title:	MATHEMATICAL FINANCE
Publisher:	BLACKWELL PUBLISHING
ISSN:	0960-1627
Date:	January 2007
Volume:	17
Number:	1
Number of Pages:	14
Page Range:	pp. 1-14
Identification Number:	10.1111/j.1467-9965.2007.00291.x
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/32556

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