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Expensive martingales 

Author: Hans Buehler ab
Affiliations:   a Quantitative Products Analytics, Global Markets Equity, Deutsche Bank AG London, London EC2N 2EQ, UK
b Institut fuumlr Mathematik, 10623 Berlin, Germany
DOI: 10.1080/14697680600668071
Publication Frequency: 8 issues per year
Published in: journal Quantitative Finance, Volume 6, Issue 3 June 2006 , pages 207 - 218
Formats available: HTML (English) : PDF (English)
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Abstract

We characterize strictly arbitrage-free markets of European options where only a discrete set of options is traded. We then construct martingales which reprice all given options and which are 'most expensive' among all martingales with this property. We also present algorithms to adjust real-life market data and to construct expensive martingales while taking into account additional 'weak' information: estimated prices of more exotic products such as, for example, forward started options.
Keywords: Marginal distribution; Transition kernel; Forward start options; Arbitrage
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