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Computing lower bounds on basket option prices by discretizing semi-infinite linear programming

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Abstract

The problem of finding static-arbitrage bounds on basket option prices has received a growing attention in the literature. In this paper, we focus on the lower bound case and propose a novel efficient solution procedure that is based on the separation problem. The computational burden of the proposed method is polynomial in the input data size. We also discuss the case of possibly negative weight vectors which can be applied to spread options.

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Acknowledgments

The authors thank Professors Peña and Zuluaga for sending their code and paper. Kim’s work was supported by the National Research Foundation of Korea, funded by the Ministry of Education (NRF-2014R1A1A2054868).

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Authors and Affiliations

  1. Industrial and Systems Engineering, Korea Advanced Institute of Science and Technology, Daejeon, South Korea

    Hyunseok Cho & Kyoung-Kuk Kim

  2. Industrial Engineering, Seoul National University, Seoul, South Korea

    Kyungsik Lee

Authors
  1. Hyunseok Cho
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  2. Kyoung-Kuk Kim
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  3. Kyungsik Lee
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Correspondence to Kyoung-Kuk Kim.

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Cho, H., Kim, KK. & Lee, K. Computing lower bounds on basket option prices by discretizing semi-infinite linear programming. Optim Lett 10, 1629–1644 (2016). https://doi.org/10.1007/s11590-015-0987-z

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  • DOI: https://doi.org/10.1007/s11590-015-0987-z

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