Model-free Price Bounds under Dynamic Option Trading
25 Pages Posted: 18 Feb 2021 Last revised: 10 Mar 2021
Date Written: January 4, 2021
In this paper we extend discrete time semi-static trading strategies by also allowing for dynamic trading in a finite amount of options, and we study the consequences for the model-independent super-replication prices of exotic derivatives. These include duality results as well as a precise characterization of pricing rules for the dynamically tradable options triggering an improvement of the price bounds for exotic derivatives in comparison with the conventional price bounds obtained through the martingale optimal transport approach.
Keywords: Martingale optimal transport, European options, Price bounds, Sensitivity
JEL Classification: G13
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