Computing lower bounds on basket option prices by discretizing semi-infinite linear programming

Computing lower bounds on basket option prices by discretizing semi-infinite linear programming

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Article ID: iaor20163747
Volume: 10
Issue: 8
Start Page Number: 1629
End Page Number: 1644
Publication Date: Dec 2016
Journal: Optimization Letters
Authors: , ,
Keywords: programming: linear, investment, optimization
Abstract:

The problem of finding static‐arbitrage bounds on basket option prices has received a growing attention in the literature. In this paper, we focus on the lower bound case and propose a novel efficient solution procedure that is based on the separation problem. The computational burden of the proposed method is polynomial in the input data size. We also discuss the case of possibly negative weight vectors which can be applied to spread options.

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