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Various passport options and their valuation

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Author Info

  • Hyungsok Ahn
  • Antony Penaud
  • Paul Wilmott
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    Abstract

    The passport option is a call option on the balance of a trading account. The option holder retains the gain from trading, while the writer is liable for the loss. Multi-asset passport options and passport options with discrete constraints are studied. For the first ones the pricing equations are Hamilton-Jacobi-Bellman equations. For those with discrete constraints, a linear complementary problem must be solved in order to price the option. The gain by selling passport options to utility maximizing investors and to investors who guess the market a certain percentage of the time is also examined.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504869950079293
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 6 (1999)
    Issue (Month): 4 ()
    Pages: 275-292

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    Handle: RePEc:taf:apmtfi:v:6:y:1999:i:4:p:275-292

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: Passport Option Trading Account Hamilton-JACOBI-BELLMAN Equation Option Pricing;

    References

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    1. Hayne E. Leland., 1979. "Who Should Buy Portfolio Insurance?," Research Program in Finance Working Papers 95, University of California at Berkeley.
    2. Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
    3. Steven E. Shreve & Jan Vecer, 2000. "Options on a traded account: Vacation calls, vacation puts and passport options," Finance and Stochastics, Springer, vol. 4(3), pages 255-274.
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