Robust price bounds for the forward starting straddle

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

Authors Martin Klimmek, David Hobson

Publication date 19 January 2015

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

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

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)

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.

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Cited in

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