Dara and Drra Option Bounds from Concurrently Expiring Options

Huang, James

doi:10.2139/ssrn.622702

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Dara and Drra Option Bounds from Concurrently Expiring Options

Lancaster University Management School Working Paper No. 2004/055

28 Pages Posted: 19 Nov 2004

See all articles by James Huang

James Huang

Lancaster University - Department of Accounting and Finance

Date Written: November 14, 2004

Abstract

In this paper, we derive option bounds from concurrently expiring options assuming the representative investor has decreasing absolute (relative) risk aversion. We show that given the prices of the underlying stock and n concurrently expiring options, the DARA (DRRA) option bound is given by a representative investor who has piecewise constant absolute (relative) risk aversion. We also derive option bounds from concurrently expiring option prices assuming the representative investor has decreasing and bounded absolute (relative) risk aversion.

Keywords: Option bounds, option pricing, DARA, DRRA, risk aversion

JEL Classification: G13

Suggested Citation: Suggested Citation

Huang, James Xiaoping, Dara and Drra Option Bounds from Concurrently Expiring Options (November 14, 2004). Lancaster University Management School Working Paper No. 2004/055, Available at SSRN: https://ssrn.com/abstract=622702 or http://dx.doi.org/10.2139/ssrn.622702