Option bounds from concurrently expiring options when relative risk aversion is bounded

Huang, J (2004) Option bounds from concurrently expiring options when relative risk aversion is bounded. Working Paper. The Department of Accounting and Finance, Lancaster University.

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Abstract

In this paper we derive option bounds from concurrently expiring option prices assuming the (pricing) representative investor’s relative risk aversion is bounded. We show that given n concurrently expiring options, the option bounds are given by pricing kernels that have (n+2)-segmented piecewise constant elasticity. Closed form formulas are presented for the case where the distribution of the stock price is log-normal.