Robust pricing and hedging of double no-touch options

DOI10.1007/S00780-011-0154-ZzbMATH Open1303.91171arXiv0901.0674OpenAlexW2106198462MaRDI QIDQ483935FDOQ483935

Authors: Jan Obłój, Alexander Matthew Gordon Cox 

Publication date: 17 December 2014

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: Double no-touch options, contracts which pay out a fixed amount provided an underlying asset remains within a given interval, are commonly traded, particularly in FX markets. In this work, we establish model-free bounds on the price of these options based on the prices of more liquidly traded options (call and digital call options). Key steps are the construction of super- and sub-hedging strategies to establish the bounds, and the use of Skorokhod embedding techniques to show the bounds are the best possible. In addition to establishing rigorous bounds, we consider carefully what is meant by arbitrage in settings where there is no {it a priori} known probability measure. We discuss two natural extensions of the notion of arbitrage, weak arbitrage and weak free lunch with vanishing risk, which are needed to establish equivalence between the lack of arbitrage and the existence of a market model.

Full work available at URL: https://arxiv.org/abs/0901.0674

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zbMATH Keywords

Skorokhod embedding problemrobust pricing and hedgingdouble no-touch optionmodel-independent arbitrageweak arbitrageweak free lunch with vanishing risk

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40) Martingales with continuous parameter (60G44)

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Cited In (64)

• On entropy martingale optimal transport theory
• On robust fundamental theorems of asset pricing in discrete time
• Distributionally robust portfolio maximization and marginal utility pricing in one period financial markets
• Perturbation analysis of sub/super hedging problems
• No-arbitrage bounds on two one-touch options
• Uncertainty quantification of derivative instruments
• Supermartingale Brenier's theorem with full-marginals constraint
• The maximum maximum of a martingale with given \(n\) marginals
• Model-independent superhedging under portfolio constraints
• Universal arbitrage aggregator in discrete-time markets under uncertainty
• The robust pricing–hedging duality for American options in discrete time financial markets
• Model-independent bounds for option prices -- a mass transport approach
• A trajectorial interpretation of Doob's martingale inequalities
• Processes that can be embedded in a geometric Brownian motion
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• The joint law of the extrema, final value and signature of a stopped random walk
• Robust bounds for the American put
• Pathwise versions of the Burkholder-Davis-Gundy inequality
• On joint distributions of the maximum, minimum and terminal value of a continuous uniformly integrable martingale
• PERFORMANCE OF ROBUST HEDGES FOR DIGITAL DOUBLE BARRIER OPTIONS
• Canonical supermartingale couplings
• Duality in a Problem of Static Partial Hedging under Convex Constraints
• Model uncertainty, recalibration, and the emergence of delta-vega hedging
• Computational methods for martingale optimal transport problems
• Some results on Skorokhod embedding and robust hedging with local time
• Optimal Skorokhod embedding under finitely many marginal constraints
• On the monotonicity principle of optimal Skorokhod embedding problem
• Irreducible convex paving for decomposition of multidimensional martingale transport plans
• UTILITY THEORY FRONT TO BACK — INFERRING UTILITY FROM AGENTS' CHOICES
• Convergence of utility indifference prices to the superreplication price in a multiple‐priors framework
• Robust deep hedging
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• Robust Framework for Quantifying the Value of Information in Pricing and Hedging
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• Utility maximization under model uncertainty in discrete time
• Robust hedging of double touch barrier options
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• Root's barrier: construction, optimality and applications to variance options
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• Arbitrage and duality in nondominated discrete-time models
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• Arbitrage bounds for prices of weighted variance swaps
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• Martingale optimal transport in the Skorokhod space
• ROBUST TRADING OF IMPLIED SKEW
• Hedging with small uncertainty aversion
• Model uncertainty and the pricing of American options
• Pointwise Arbitrage Pricing Theory in Discrete Time
• Tightness and duality of martingale transport on the Skorokhod space
• A risk-neutral equilibrium leading to uncertain volatility pricing
• A forward equation for barrier options under the Brunick \& Shreve Markovian projection
• Robust pricing and hedging of options on multiple assets and its numerics

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