25 Pages Posted: 10 Apr 2005
Date Written: January 2004
We characterize strictly arbitrage-free markets of European options where only a discrete set of options is traded. We then construct martingales which reprice all given options and which are most expensive among all martingales with this property.
We also present algorithms to adjust real life market data and to construct expensive martingales while taking into account additional weak information: Estimated prices of more exotic products such as, for example, forward started options.
Keywords: Marginals, Martingale, Transition Probability, Balayage, Linear Programming, Discrete Pricing, Measures, Forward Started Options, European Options
JEL Classification: C60
Suggested Citation: Suggested Citation