A Harmonic Analysis Solution to the Static Basket Arbitrage Problem
Princeton University - Department of Operations Research and Financial Engineering
September 2, 2003
We consider the problem of computing upper and lower bounds on the price of a European basket call option, given prices on other similar baskets. We focus here on an interpretation of this program as a generalized moment problem. Recent results by Berg & Maserick (1984), Putinar & Vasilescu (1999) and Lasserre (2001) on harmonic analysis on semigroups, the K-moment problem and its applications to optimization, allow us to derive tractable necessary and sufficient conditions for the absence of static arbitrage between basket straddles, hence between basket calls and puts.
Number of Pages in PDF File: 15
Keywords: Basket options, semidefinite programming, static arbitrage, K-moment
JEL Classification: C61, C63, G12working papers series
Date posted: July 13, 2004
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