Bounding Option Prices by Semidefinite Programming: A Cutting Plane Algorithm
Management Science · 2002 · Volume 48 · Issue 5
DOI: 10.1287/mnsc.48.5.665.7801
Abstract
In a recent article, Bertsimas and Popescu showed that a tight upper bound on a Europeantype call option price, given the first n moments of the distribution of the underlying security price, can be obtained by solving an associated semidefinite programming problem (SDP). The purpose of this paper is to improve and extend their results. We will show that a tight lower bound can be calculated by solving another SDP. Also, we will show that these problems can be solved very quickly by a newly developed cutting plane algorithm when n is less than six or seven.
Keywords
bounds on option prices, semidefinite programming problem, cutting plane algorithm
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