A Multi-Parameter Extension of Figlewski’s Option-Pricing Formula

Appl Stoch Models Bus & Ind

2014

Self Cite

Section: Resultsmentioning

confidence: 88%

Section: Introductionmentioning

confidence: 90%

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Arbitrage‐free call option surface construction using regression splines

Appl Stoch Models Bus & Ind

2014

Self Cite

“…Although these two conditions are not always required for the construction of an arbitrage-free option surface, they are commonly stated in the literature (see for example Aït-Sahalia and Duarte (2003), Fengler (2009), Monnier (2013) and Orosi (2011)). …”

Section: Discussion and Future Researchmentioning

confidence: 99%

Novel no-arbitrage conditions for options written on defaultable assets

2014

J Deriv Hedge Funds

Self Cite

is currently an assistant professor in the Department of Mathematics and Statistics at American University of Sharjah. He holds a PhD in Applied Mathematics with a specialization in mathematical finance from the University of Calgary. His research areas include computational finance and applications, numerical methods applied to derivative pricing, empirical performance of option pricing models, and non-parametric modeling.Correspondence: Greg Orosi, Department of Mathematics and Statistics, American University of Sharjah, Office: Nab 254, PO Box 26666, Sharjah, UAE E-mail: gorosi@ucalgary.ca ABSTRACT In this work, we derive an improved lower bound for European-style put options written on defaultable assets. Furthermore, we establish two additional no-arbitrage conditions, one for European-style puts and one for calls, which are tighter than the ones commonly reported in current literature. All of our results are based on static arbitrage arguments and have important implications for constructing arbitrage-free call or put option surfaces. In particular, we point out that the commonly stated conditions required for a call option surface are not always sufficient to generate an arbitrage-free call option surface.

“…Moreover, let C(K, T) be the current price of a European call option on the stock with strike K, maturity T. It can be shown (see, for example, Orosi, 2011) that…”

Section: Assumptions and Notationmentioning

confidence: 99%

Improved lower bounds of call options written on defaultable assets

2014

J Deriv Hedge Funds

Self Cite

is currently an Assistant Professor in the Department of Mathematics and Statistics at the American University of Sharjah. He holds a PhD in Applied Mathematics with a specialization in mathematical finance from the University of Calgary. His research areas include computational finance and applications, numerical methods applied to derivative pricing, empirical performance of option pricing models and non-parametric modeling.Correspondence: Greg Orosi, Department of Mathematics and Statistics, American University of Sharjah, Nab 254, PO Box 26666, Sharjah, UAE E-mail: gorosi@ucalgary.ca ABSTRACT This article provides an improvedmodel-independent lower bound of European call options written on defaultable assets. On the basis of static arbitrage arguments, improved lower bounds are established, which also depend on the probability of option-implied default. The results are also extended to dividend-paying stocks. Moreover, our findings imply that it is never optimal to exercise certain American call options. Finally, we discuss the implications of our results for constructing an arbitrage-free volatility surface and extracting risk-neutral densities from option prices.