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American Options with guarantee – A class of two-sided stopping problems

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Listed:
  • Christensen Sören
  • Irle Albrecht

    (Christian-Albrechts-Universität, Kiel Mathematisches Seminar, Ludewig-Meyn-Str. 4, 24098 Kiel, Germany)

Abstract

We introduce a class of optimal stopping problems in which the gain is at least a fraction of the initial value. From a financial point of view this structure can be seen as a guarantee for the holder of an American option. It turns out that the optimal strategies are of two-sided type under weak conditions. If the driving process is a diffusion we use harmonic-functions techniques to obtain general results. For an explicit solution we derive two differential equations that characterize the optimal strategies. Furthermore we study the case of Lévy processes. An explicit solution is obtained for spectrally negative processes using scale functions

Suggested Citation

  • Christensen Sören & Irle Albrecht, 2013. "American Options with guarantee – A class of two-sided stopping problems," Statistics & Risk Modeling, De Gruyter, vol. 30(3), pages 237-254, August.
    • Handle: RePEc:bpj:strimo:v:30:y:2013:i:3:p:237-254:n:4
    DOI: 10.1524/strm.2013.1122
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    References listed on IDEAS

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    1. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-778, April.
    2. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-777, April.
    3. Mark Broadie & Jérôme Detemple, 1997. "The Valuation of American Options on Multiple Assets," Mathematical Finance, Wiley Blackwell, vol. 7(3), pages 241-286, July.
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