A Harmonic Analysis Solution to the Static Basket Arbitrage Problem
15 Pages Posted: 13 Jul 2004
Date Written: September 2, 2003
Abstract
We consider the problem of computing upper and lower bounds on the price of a European basket call option, given prices on other similar baskets. We focus here on an interpretation of this program as a generalized moment problem. Recent results by Berg & Maserick (1984), Putinar & Vasilescu (1999) and Lasserre (2001) on harmonic analysis on semigroups, the K-moment problem and its applications to optimization, allow us to derive tractable necessary and sufficient conditions for the absence of static arbitrage between basket straddles, hence between basket calls and puts.
Keywords: Basket options, semidefinite programming, static arbitrage, K-moment
JEL Classification: C61, C63, G12
Suggested Citation: Suggested Citation
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