Index Options: A Model-Free Approach
55 Pages Posted: 28 Mar 2012 Last revised: 3 Apr 2012
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Index Options: A Model-Free Approach
Date Written: April 3, 2012
Abstract
This paper contains an overview and an extension of the theory on comonotonicity-based model-free upper bounds and super-replicating strategies for stock index options, as presented in Hobson et al. (2005) and Chen et al. (2008). Whereas these authors only consider index call options, here a uni ed approach for call and put options is presented. Considering a unifi ed framework gives rise to an efficient algorithm for calculating upper bounds and for determining the corresponding superhedging strategies for both cases. The uni ed framework also allows to extend several existing results, in particular on the optimality of the superhedging strategies. Several practical issues concerning the implementation of the results are discussed. In particular, a simpli fied algorithm is presented for the situation where for some of the constituent stock in the index there are no options available.
Keywords: index call and put options, comonotonicity, model-free approach, static super-replicating strategies
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