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Minimum Guaranteed Payments and Costly Cancellation Rights: A Stopping Game Perspective

Author

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  • Luis H. R. Alvarez E.

    (Department of Economics, Turku School of Economics)

Abstract

We 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.

Suggested Citation

  • Luis H. R. Alvarez E., 2006. "Minimum Guaranteed Payments and Costly Cancellation Rights: A Stopping Game Perspective," Discussion Papers 12, Aboa Centre for Economics.
    • Handle: RePEc:tkk:dpaper:dp12
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    File URL: http://www.ace-economics.fi/kuvat/ACE12%20Alvarez.pdf
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    References listed on IDEAS

    as
    1. Andreas Kyprianou, 2004. "Some calculations for Israeli options," Finance and Stochastics, Springer, vol. 8(1), pages 73-86, January.
    2. Erik Ekstrom & Stephane Villeneuve, 2006. "On the value of optimal stopping games," Papers math/0610324, arXiv.org.
    3. Luis H. R. Alvarez E., 2006. "A Class of Solvable Stopping Games," Discussion Papers 11, Aboa Centre for Economics.
    4. Yuri Kifer, 2000. "Game options," Finance and Stochastics, Springer, vol. 4(4), pages 443-463.
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    Cited by:

    1. Yuri Kifer, 2012. "Dynkin Games and Israeli Options," Papers 1209.1791, arXiv.org.

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    More about this item

    Keywords

    minimum guaranteed payment; δ-penalty options; Dynkin games; linear diffusions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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