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Perpetual Options on Multiple Underlyings

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  • Peter W. Duck
  • Geoffrey W. Evatt
  • Paul V. Johnson

Abstract

We study three classes of perpetual option with multiple uncertainties and American-style exercise boundaries, using a partial differential equation-based approach. A combination of accurate numerical techniques and asymptotic analyses is implemented, with each approach informing and confirming the other. The first two examples we study are a put basket option and a call basket option, both involving two stochastic underlying assets, whilst the third is a (novel) class of real option linked to stochastic demand and costs (the details of the modelling for this are described in the paper). The Appendix addresses the issue of pricing American-style perpetual options involving (just) one stochastic underlying, but in which the volatility is also modelled stochastically, using the Heston (1993) framework.

Suggested Citation

  • Peter W. Duck & Geoffrey W. Evatt & Paul V. Johnson, 2014. "Perpetual Options on Multiple Underlyings," Applied Mathematical Finance, Taylor & Francis Journals, vol. 21(2), pages 174-200, April.
    • Handle: RePEc:taf:apmtfi:v:21:y:2014:i:2:p:174-200
    DOI: 10.1080/1350486X.2013.825437
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    References listed on IDEAS

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    Cited by:

    1. Nadarajah, Saralees, 2015. "On closed form expressions for probability of operational success and expected lifetime," Applied Mathematics and Computation, Elsevier, vol. 262(C), pages 308-311.

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