Article ID: | iaor1998698 |
Country: | United States |
Volume: | 43 |
Issue: | 2 |
Start Page Number: | 206 |
End Page Number: | 216 |
Publication Date: | Feb 1997 |
Journal: | Management Science |
Authors: | Basso Antonella, Pianca Paolo |
Keywords: | investment, programming: mathematical |
In this paper efficient bounds for the price of a call option are obtained using the decreasing absolute risk aversion (DARA) dominance rule. Such lower and upper bounds are obtained minimizing and maximizing, respectively, the objective function of a nonlinear optimization problem. An explicit formula (related to an exponential utility function) is given for the special case of three states of nature. A large number of experiments have been carried out and the numerical results support the conjecture that the same formula holds for problems with a number of states