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The Russian option: Finite horizon

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  • Goran Peskir

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    Abstract

    We show that the optimal stopping boundary for the Russian option with finite horizon can be characterized as the unique solution of a nonlinear integral equation arising from the early exercise premium representation (an explicit formula for the arbitrage-free price in terms of the optimal stopping boundary having a clear economic interpretation). The results obtained stand in a complete parallel with the best known results on the American put option with finite horizon. The key argument in the proof relies upon a local time-space formula. Copyright Springer-Verlag Berlin/Heidelberg 2005

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    File URL: http://hdl.handle.net/10.1007/s00780-004-0133-8
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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 9 (2005)
    Issue (Month): 2 (04)
    Pages: 251-267

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    Handle: RePEc:spr:finsto:v:9:y:2005:i:2:p:251-267

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    Web page: http://www.springerlink.com/content/101164/

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    Related research

    Keywords: Russian option; finite horizon; arbitrage-free price; optimal stopping; smooth-fit; geometric Brownian motion; free-boundary problem; nonlinear integral equation; local time-space calculus; curved boundary;

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    Cited by:
    1. Gapeev, P.V. & Peskir, G., 2006. "The Wiener disorder problem with finite horizon," Stochastic Processes and their Applications, Elsevier, vol. 116(12), pages 1770-1791, December.
    2. Tiziano De Angelis & Giorgio Ferrari, 2013. "A Stochastic Reversible Investment Problem on a Finite-Time Horizon: Free Boundary Analysis," Working Papers 477, Bielefeld University, Center for Mathematical Economics.

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