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Research output: Working paper

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**Risk neutral probabilities and option bounds: a geometric approach.** / Huang, J.

Research output: Working paper

Huang, J 2004 'Risk neutral probabilities and option bounds: a geometric approach' Accounting and Finance Working Paper Series, The Department of Accounting and Finance, Lancaster University.

Huang, J. (2004). *Risk neutral probabilities and option bounds: a geometric approach*. (Accounting and Finance Working Paper Series). The Department of Accounting and Finance.

Huang J. Risk neutral probabilities and option bounds: a geometric approach. Lancaster University: The Department of Accounting and Finance. 2004. (Accounting and Finance Working Paper Series).

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title = "Risk neutral probabilities and option bounds: a geometric approach",

abstract = "In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option bounds by identifying the risk neutral probability density function which intersects all admissible ones for certain number of times. Applying this approach we tighten the first order stochastic dominance option bounds from concurrently expiring options when the maximum value of the risk neutral density are known.",

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N2 - In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option bounds by identifying the risk neutral probability density function which intersects all admissible ones for certain number of times. Applying this approach we tighten the first order stochastic dominance option bounds from concurrently expiring options when the maximum value of the risk neutral density are known.

AB - In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option bounds by identifying the risk neutral probability density function which intersects all admissible ones for certain number of times. Applying this approach we tighten the first order stochastic dominance option bounds from concurrently expiring options when the maximum value of the risk neutral density are known.

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KW - option pricing

KW - risk neutral density

KW - first order stochastic dominance

M3 - Working paper

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