Computing lower bounds on basket option prices by discretizing semi-infinite linear programming

Abstract

The problem of finding static-arbitrage bounds on basket option prices has received a growing attention in the literature. In this paper, we focus on the lower bound case and propose a novel efficient solution procedure that is based on the separation problem. The computational burden of the proposed method is polynomial in the input data size. We also discuss the case of possibly negative weight vectors which can be applied to spread options.