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Pricing European call options under a hard-to-borrow stock model

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  • Ma, Guiyuan
  • Zhu, Song-Ping
  • Chen, Wenting

Abstract

This paper studies European call option pricing problem under a hard-to-borrow stock model where stock price and buy-in rate are fully coupled. Avellaneda and Lipkin (2009) proposed a simplified solution approach with an independence assumption, and then derived a semi-explicit pricing formula. However, such an approach has limited its application to more general cases. In this paper, we propose a partial differential equation (PDE) approach for pricing European call options, regardless of the independence assumption. A two-dimensional PDE is derived first with a set of appropriate boundary conditions. Then, two numerical schemes are provided with different treatments of the jump term.

Suggested Citation

  • Ma, Guiyuan & Zhu, Song-Ping & Chen, Wenting, 2019. "Pricing European call options under a hard-to-borrow stock model," Applied Mathematics and Computation, Elsevier, vol. 357(C), pages 243-257.
    • Handle: RePEc:eee:apmaco:v:357:y:2019:i:c:p:243-257
    DOI: 10.1016/j.amc.2019.04.002
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    References listed on IDEAS

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    Cited by:

    1. Peng Liu, 2020. "Change of measure under the hard-to-borrow model," Papers 2001.10384, arXiv.org.

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