Premium
THE RANGE OF TRADED OPTION PRICES
Author(s) -
Davis Mark H. A.,
Hobson David G.
Publication year - 2007
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.2007.00291.x
Subject(s) - arbitrage , economics , dividend , volatility (finance) , asset (computer security) , econometrics , financial market , range (aeronautics) , fundamental theorem of asset pricing , financial economics , implied volatility , mathematical economics , arbitrage pricing theory , capital asset pricing model , finance , computer science , materials science , computer security , composite material
Suppose we are given a set of prices of European call options over a finite range of strike prices and exercise times, written on a financial asset with deterministic dividends which is traded in a frictionless market with no interest rate volatility. We ask: when is there an arbitrage opportunity? We give conditions for the prices to be consistent with an arbitrage‐free model (in which case the model can be realized on a finite probability space). We also give conditions for there to exist an arbitrage opportunity which can be locked in at time zero. There is also a third boundary case in which prices are recognizably misspecified, but the ability to take advantage of an arbitrage opportunity depends upon knowledge of the null sets of the model.