Option Pricing Bounds in Discrete Time

Authors

  • STYLIANOS PERRAKIS,

  • PETER J. RYAN

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    • Professor and Associate Professor, Faculty of Administration, University of Ottawa. A preliminary version of this paper was presented under a different title at the 4th World Congress of the Econometric Society at Aix-en-Provence, in August 1980. The authors wish to thank a referee of this Journal for helpful advice and comment.

ABSTRACT

Upper and lower bounds are derived for call options traded at discrete intervals. These bounds are independent of assumptions on the stock price distribution other than a restriction satisfied by the stock being “non-negative beta.” The development of the bounds relies on the single-price law and arbitrage arguments. Both single-period and multiperiod results are produced, and put option bounds follow by extension. The bounds exist as equilibrium values given a consensus on stock price distribution; they are also valid for empirical studies, being adjustable for dividends and commissions.

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