Calibrated Option Bounds

This paper proposes a numeical approach for computing bounds for the arbitrage-free prices of an option when some options are available for trading. Convex duality reveals a close relationship with recently proposed calibration techniques and implied trees. Our approach is intimatly related to the uncertain volatility model of Avellaneda, Levy and Paras, but it is more general in that it is based on any particular form of the asset price process and does not require the seller's price of an option to be a differentiable function of the cash-flows of the option. Numericaltests on S&P 500 options demonstrate the accuracy and robustness of the proposed method.

By: Alan J. King, Matti Koivu, Teemu Pennanen

Published in: RC22810 in 2003


This Research Report is available. This report has been submitted for publication outside of IBM and will probably be copyrighted if accepted for publication. It has been issued as a Research Report for early dissemination of its contents. In view of the transfer of copyright to the outside publisher, its distribution outside of IBM prior to publication should be limited to peer communications and specific requests. After outside publication, requests should be filled only by reprints or legally obtained copies of the article (e.g., payment of royalties). I have read and understand this notice and am a member of the scientific community outside or inside of IBM seeking a single copy only.


Questions about this service can be mailed to .