Journal of Risk

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Acceptability bounds for forward starting options using disciplined convex programming

Dilip B. Madan

  • Bounds with constraints for risk acceptability and option repricing at bordering maturities.
  • Dual problem disciplined convex solved by CVX technology.
  • Implementation of hedging to acceptability using convex duality. 

ABSTRACT

Acceptability pricing is formulated, for the dual problem, as a disciplined convex program solvable by the software CVXOPT. Forward starting options are used to illustrate the procedures for acceptability defined by positive expectation under the concave distortion minmaxvar. The measures used are required to reprice the liquid assets and must belong to the support set of acceptability. The bounds obtained are substantially tighter than they would have been had we left out either the repricing constraints or the support sets for acceptability.

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