Bounding a 33-strike put from a 35-strike put
Question
A stock trades at , and a European put struck at costs . Using only this information, give the best estimate (the tightest super-replication bound) for the price of a put on the same stock and expiry struck at , to two decimals.
Short answer
About . For a non-negative stock, , so of a put super-replicates the put. That bounds its price by , tighter than the naive bound .
Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.
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Open the worked solutionLessons behind this question
- Market Model and Risk-Neutral Valuation
- Option Mechanics: Calls, Puts, Moneyness, Intrinsic Value, and Exchange vs. OTC Markets
- Option Trading Strategies: Spreads, Combinations, and Payoff Engineering
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