Minimum Guaranteed Payments and Costly Cancellation Rights: A Stopping Game Perspective
AbstractWe consider the valuation and optimal exercise policy of a δ- penalty minimum guaranteed payment option in the case where the value of the underlying dividend-paying asset follows a linear diffusion. We characterize both the value and optimal exercise policy of the considered game option explicitly and demonstrate that increased volatility increases the value of the option and postpones exercise by expanding the continuation region where exercising is suboptimal. An interesting and natural implication of this finding is that the value of the embedded cancellation rights of the issuer increase as volatility increases.
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Bibliographic InfoPaper provided by Aboa Centre for Economics in its series Discussion Papers with number 12.
Date of creation: Nov 2006
Date of revision:
minimum guaranteed payment; δ-penalty options; Dynkin games; linear diffusions;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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- Ekstrom, Erik & Villeneuve, Stéphane, 2006.
"On the Value of Optimal Stopping Games,"
Open Access publications from University of Toulouse 1 Capitole
http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- Yuri Kifer, 2000. "Game options," Finance and Stochastics, Springer, vol. 4(4), pages 443-463.
- Andreas Kyprianou, 2004. "Some calculations for Israeli options," Finance and Stochastics, Springer, vol. 8(1), pages 73-86, January.
- Luis H. R. Alvarez E., 2006. "A Class of Solvable Stopping Games," Discussion Papers 11, Aboa Centre for Economics.
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