Valuation of American Continuous-Installment Options
AbstractIn an American continuous-installment option the premium, instead of being paid up-front, is paid at a certain rate per unit time. At any time at or before maturity date, the holder has the right to terminate payments and either exercise the option or "walk away" from deal. Under the standard Black-Scholes assumptions, we can construct an instantaneous riskless dynamic hedging portfolio and derive a Partial Differential Equation (PDE) for the value of this option. This key result enables us to derive valuation formulas for American continuous-installment options using the well-known integral representation along the early exercise boundary. The finite difference approach to solve the PDE is also examined, and numerical techniques to implement the valuation formulas are presented
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 345.
Date of creation: 11 Aug 2004
Date of revision:
Option pricing; Hedging;
Other versions of this item:
- Pierangelo Ciurlia & Ilir Roko, 2005. "Valuation of American Continuous-Installment Options," Computational Economics, Society for Computational Economics, vol. 25(1), pages 143-165, February.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-11-22 (All new papers)
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