View article

A static arbitrage bound on a basket option is a bound on its price inferred solely from the prices of similar options and the absence of arbitrage. Since they are derived solely from the absence of an arbitrage assumption, these types of bounds must be satisfied by any pricing model. This semiparametric approach to option pricing problems can be seen as an alternative to parametric techniques (such as Monte Carlo simulations) that determine the price of an option as the discounted expected options payoff under an appropriate risk-neutral measure. Semiparametric techniques are especially useful in incomplete market conditions, or when the number of underlying assets makes the computation of parametric prices numerically challenging. Also, semiparametric techniques are very useful in instances of the pricing problem where due to scarcity of data, little is known about the underlying asset price distribution, or …