[This paper develops and tests arbitrage bounds for a combination of two option spread positions known as a box spread. This strategy involves the simultaneous use of four options and creates a position that is equivalent to riskless lending. The no-arbitrage conditions are compared to existing arbitrage bounds and are tested using Chicago Board Options Exchange data.]

This paper derives and tests a new linear programming (LP) approach to bond portfolio management. The model elicits possible tax-clientele effects in the pricing of U.S. Gov? ernment coupon bonds and simultaneously derives the optimal tax-specific bond portfolio. Analytically, the model derives these results by exploiting, for a given tax bracket, the price differential of an after-tax stream of cash flows. It accomplishes this objective by purchasing at the ask price underprieed bonds (for the specific tax bracket), while sim? ultaneously selling at the bid price overpriced bonds. The model requires that the net cash flow, inclusive of purchased and sold bonds, be nonnegative at all future dates; the problem's formulation standardizes the position taken in each bond to a maximum of one unit. One of the model's appealing features is the parsimonious number of required calcu? lations: only one LP program need be run per tax bracket. In addition to obtaining an optimally chosen tax-specific bond portfolio, the model also measures the after-tax term structure of spot U.S. Government interest rates for both tax-exempt and taxable investors. Finally, the superior monthly holding-period rates of return on the optimal taxspecific bond portfolio demonstrate an important property ofthe model's output.

The daily and intraday behavior of returns on Chicago Board Options Exchange options is examined. Option returns contain systematic patterns even after adjusting for patterns in the means and variances of the underlying assets. This is consistent with the hypothesis that informed trading in options can make the order flow in the options market informative about the value of the underlying asset, making options nonredundant. The intraday patterns in adjusted option return variances are further consistent with a model of strategic trading by informed and discretionary liquidity traders.

Ehud I. Ronn, Valuation of Risky Assets in Arbitrage Free Economies: Discussion, The Journal of Finance, Vol. 41, No. 3, Papers and Proceedings of the Forty-Fourth Annual Meeting of the America Finance Association, New York, New York, December 28-30, 1985 (Jul., 1986), pp. 557-560

This paper develops and tests arbitrage bounds for a combination of two option spread positions known as a box spread. This strategy involves the simultaneous use of four options and creates a position that is equivalent to riskless lending. The no-arbitrage conditions are compared to existing arbitrage bounds and are tested using Chicago Board Options Exchange data.