Robust price bounds for the forward starting straddle

DOI10.1007/S00780-014-0249-4zbMATH Open1396.91735arXiv1304.2141OpenAlexW2165299046MaRDI QIDQ486935FDOQ486935

Authors: Martin Klimmek, David Hobson 

Publication date: 19 January 2015

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

Abstract: In this article we consider the problem of giving a robust, model-independent, lower bound on the price of a forward starting straddle with payoff $|F_{T_1}-F_{T_0}|$ where $0<T_0<T_1$. Rather than assuming a model for the underlying forward price $(F_t{)}_{tgeq0}$, we assume that call prices for maturities $T_0<T_1$ are given and hence that the marginal laws of the underlying are known. The primal problem is to find the model which is consistent with the observed call prices, and for which the price of the forward starting straddle is minimised. The dual problem is to find the cheapest semi-static subhedge. Under an assumption on the supports of the marginal laws, but no assumption that the laws are atom-free or in any other way regular, we derive explicit expressions for the coupling which minimises the price of the option, and the form of the semi-static subhedge.

Full work available at URL: https://arxiv.org/abs/1304.2141

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zbMATH Keywords

martingale optimal transportmartingale couplingstatic hedgingforward starting straddlemodel-independent bounds

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Martingales with discrete parameter (60G42)

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Cited In (43)

• Optimal Brownian Stopping When the Source and Target Are Radially Symmetric Distributions
• Convex order, quantization and monotone approximations of ARCH models
• A new family of one dimensional martingale couplings
• Continuity of the martingale optimal transport problem on the real line
• A construction of the left-curtain coupling
• Robust statistical arbitrage strategies
• Fine properties of the optimal Skorokhod embedding problem
• On intermediate marginals in martingale optimal transportation
• Robust bounds for the American put
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• All adapted topologies are equal
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• Perturbation analysis of sub/super hedging problems
• Multiperiod martingale transport
• Supermartingale shadow couplings: the decreasing case
• Faking Brownian motion with continuous Markov martingales
• A solution to the Monge transport problem for Brownian martingales
• A potential-based construction of the increasing supermartingale coupling
• Tightening robust price bounds for exotic derivatives
• No-arbitrage bounds for the forward smile given marginals
• SAMPLING OF ONE-DIMENSIONAL PROBABILITY MEASURES IN THE CONVEX ORDER AND COMPUTATION OF ROBUST OPTION PRICE BOUNDS
• An explicit martingale version of the one-dimensional Brenier's theorem with full marginals constraint
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