Expensive martingales
- 1 June 2006
- journal article
- research article
- Published by Taylor & Francis in Quantitative Finance
- Vol. 6 (3) , 207-218
- https://doi.org/10.1080/14697680600668071
Abstract
We characterize strictly arbitrage-free markets of European options where only a discrete set of options is traded. We then construct martingales which reprice all given options and which are ‘most expensive’ among all martingales with this property. We also present algorithms to adjust real-life market data and to construct expensive martingales while taking into account additional ‘weak’ information: estimated prices of more exotic products such as, for example, forward started options.Keywords
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