Working Papers in Economics,
University of Bergen, Department of Economics

Abstract: Financial options typically incorporate times of exercise. Alternatively, they embody set-up costs or indivisibilities. Such features lead to planning problems with integer decision variables. Provided the sample space be finite, it is shown here that integrality constraints can often be relaxed. In fact, simple mathematical programming, aimed at arbitrage or replication, may find optimal exercise, and bound or identify option prices. When the asset market is incomplete, the bounds stem from nonlinear pricing functionals.

Keywords: asset pricing; arbitrage; options; finite sample space; scenario tree; equivalent martingale measures; bid-ask intervals; incomplete market; linear programming; combinatorial optimization; totally unimodular matrices.

JEL-codes: C61; C62

20 pages, July 10, 2007

Full text files

No.%2008-07.pdf  Full text

Download statistics

• University of Bergen, Department of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Kjell Erik Lommerud ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:10:55.