Bounds for Exotics

36 Pages Posted: 6 Aug 2003 Last revised: 15 Jun 2011

See all articles by George L. Ye

George L. Ye

Beijing Institute of Technology at Zhuhai

Abstract

Due to the complex structures of exotic options, it is difficult to derive exotic option pricing bounds using the conventional "no-arbitrage argument" approach. In this paper we present a new approach called the volatility bound approach to derive distribution and preference-free bounds on exotics. In particular, the bounds on Asian options, barrier options, and compound options are presented, with the possibility to extend to other exotic options. Further, we show that the bounds can provide many important insights which sharpen our understanding of those complex instruments.

Keywords: exotic option, risk management, model risk, option price

JEL Classification: G13

Suggested Citation

Ye, George Longsen, Bounds for Exotics. Available at SSRN: https://ssrn.com/abstract=424080 or http://dx.doi.org/10.2139/ssrn.424080

George Longsen Ye (Contact Author)

Beijing Institute of Technology at Zhuhai ( email )

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