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arxiv: cs/0407029 · v1 · submitted 2004-07-10 · 💻 cs.CE

Static versus Dynamic Arbitrage Bounds on Multivariate Option Prices

classification 💻 cs.CE
keywords pricesarbitragemodelstaticboundsblack-scholescallslarge
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We compare static arbitrage price bounds on basket calls, i.e. bounds that only involve buy-and-hold trading strategies, with the price range obtained within a multi-variate generalization of the Black-Scholes model. While there is no gap between these two sets of prices in the univariate case, we observe here that contrary to our intuition about model risk for at-the-money calls, there is a somewhat large gap between model prices and static arbitrage prices, hence a similarly large set of prices on which a multivariate Black-Scholes model cannot be calibrated but where no conclusion can be drawn on the presence or not of a static arbitrage opportunity.

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