Model-free Price Bounds under Dynamic Option Trading

25 Pages Posted: 18 Feb 2021 Last revised: 10 Mar 2021

See all articles by Ariel Neufeld

Ariel Neufeld

ETH Zürich

Julian Sester

University of Freiburg; Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences

Date Written: January 4, 2021

Abstract

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

Suggested Citation

Neufeld, Ariel and Sester, Julian and Sester, Julian, Model-free Price Bounds under Dynamic Option Trading (January 4, 2021). Available at SSRN: https://ssrn.com/abstract=3759550 or http://dx.doi.org/10.2139/ssrn.3759550

Ariel Neufeld

ETH Zürich

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Julian Sester (Contact Author)

Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

University of Freiburg

Freiburg, D-79085
Germany

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