Advanced Search
MyIDEAS: Login to save this paper or follow this series

A systematic approach for valuing European-style installment options with continuous payment plan

Contents:

Author Info

  • Pierangelo Ciurlia
Registered author(s):

    Abstract

    In this paper we present an integral equation approach for the valuation of European-style installment derivatives when the premium payments, made continuously throughout the contract’s life, are assumed to be a function of the asset price and time variables. The contribution of this study is threefold. First, we show that in the Black-Scholes framework the option pricing problem can be formulated as a free boundary problem under very general conditions on payo structure and installment payment plan. Second, by applying a Fourier transform-based solution technique, we derive a recursive integral equation for the free boundary along with a general integral representation for the option initial premium. Third, within this systematic treatment of the European installment options, we propose a unified and easily applicable method to deal with a broad range of monotonic payo functions and continuous payment plans depending on the time variable only. Finally, by using the illustrative example of European vanilla installment call options, an explicit valuation formula is obtained for the class of linear time-varying installment payment functions.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://host.uniroma3.it/dipartimenti/economia/pdf/WP115.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0115.

    as in new window
    Length: 24
    Date of creation: Apr 2010
    Date of revision:
    Handle: RePEc:rtr:wpaper:0115

    Contact details of provider:
    Postal: Via Silvio d'Amico 77, - 00145 Rome Italy
    Phone: +39 06 57114612
    Fax: +39 06 57114771
    Email:
    Web page: http://host.uniroma3.it/dipartimenti/economia/it/
    More information through EDIRC

    Related research

    Keywords: Installment options; free boundary problem; Fourier transform; integral representations;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:rtr:wpaper:0115. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Telephone for information).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.