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The pricing formula for cancellable European options

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  • Hsuan-Ku Liu
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    Abstract

    This paper examines the value of a cancellable European option in a finite time horizon setting. The specifications of this generalized European option allow the seller to cancel the option at any point in time for a fixed penalty paid directly to the holder. Here, we provide an explicit valuation formula for the European game call where the early cancellation time is obtained iteratively.

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    File URL: http://arxiv.org/pdf/1304.5962
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1304.5962.

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    Date of creation: Apr 2013
    Date of revision: May 2013
    Handle: RePEc:arx:papers:1304.5962

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    Web page: http://arxiv.org/

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    1. Andreas Kyprianou, 2004. "Some calculations for Israeli options," Finance and Stochastics, Springer, Springer, vol. 8(1), pages 73-86, January.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. Yuri Kifer, 2000. "Game options," Finance and Stochastics, Springer, Springer, vol. 4(4), pages 443-463.
    4. Christoph Kühn & Andreas E. Kyprianou, 2007. "Callable Puts As Composite Exotic Options," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 17(4), pages 487-502.
    5. Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(2), pages 207-211, June.
    6. Jan Kallsen & Christoph Kühn, 2004. "Pricing derivatives of American and game type in incomplete markets," Finance and Stochastics, Springer, Springer, vol. 8(2), pages 261-284, 05.
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