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The pricing formula for cancellable European options

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  • Hsuan-Ku Liu

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.

Suggested Citation

  • Hsuan-Ku Liu, 2013. "The pricing formula for cancellable European options," Papers 1304.5962, arXiv.org, revised Sep 2014.
    • Handle: RePEc:arx:papers:1304.5962
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    References listed on IDEAS

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    1. Yuri Kifer, 2000. "Game options," Finance and Stochastics, Springer, vol. 4(4), pages 443-463.
    2. Erik Ekström, 2006. "Properties of game options," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 63(2), pages 221-238, May.
    3. Baurdoux, Erik J. & Kyprianou, Andreas E., 2004. "Further calculations for Israeli options," LSE Research Online Documents on Economics 23916, London School of Economics and Political Science, LSE Library.
    4. Andreas Kyprianou, 2004. "Some calculations for Israeli options," Finance and Stochastics, Springer, vol. 8(1), pages 73-86, January.
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    6. Christoph Kühn & Andreas E. Kyprianou, 2007. "Callable Puts As Composite Exotic Options," Mathematical Finance, Wiley Blackwell, vol. 17(4), pages 487-502, October.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 9(2), pages 207-211, June.
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