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American chooser options

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  • Detemple, Jérôme
  • Emmerling, Thomas

Abstract

This paper examines the valuation of American chooser options, i.e., American-style contracts written on the maximum of an American put and an American call. The structure of the immediate exercise region is examined. The early exercise premium representation of the chooser's price is derived and used to construct a system of coupled recursive integral equations for a pair of boundary components. Numerical implementations of the model based on this system are carried out and used to examine the boundary properties and the price behavior.

Suggested Citation

  • Detemple, Jérôme & Emmerling, Thomas, 2009. "American chooser options," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 128-153, January.
    • Handle: RePEc:eee:dyncon:v:33:y:2009:i:1:p:128-153
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    References listed on IDEAS

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    1. Jing-Zhi Huang & Marti G. Subrahmanyam & G. George Yu, 1999. "Pricing And Hedging American Options: A Recursive Integration Method," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar, chapter 8, pages 219-239, World Scientific Publishing Co. Pte. Ltd..
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    6. Kim, In Joon, 1990. "The Analytic Valuation of American Options," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 547-572.
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    8. Broadie, Mark & Detemple, Jerome, 1996. "American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods," The Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1211-1250.
    9. Siim Kallast & Andi Kivinukk, 2003. "Pricing and Hedging American Options Using Approximations by Kim Integral Equations," Review of Finance, Springer, vol. 7(3), pages 361-383.
    10. Siim Kallast & Andi Kivinukk, 2003. "Pricing and Hedging American Options Using Approximations by Kim Integral Equations," Review of Finance, European Finance Association, vol. 7(3), pages 361-383.
    11. Marek Rutkowski, 1994. "The Early Exercise Premium Representation Of Foreign Market American Options1," Mathematical Finance, Wiley Blackwell, vol. 4(4), pages 313-325, October.
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    13. Mark Broadie & Jérôme Detemple, 1997. "The Valuation of American Options on Multiple Assets," Mathematical Finance, Wiley Blackwell, vol. 7(3), pages 241-286, July.
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    Cited by:

    1. Kirkby, J. Lars & Nguyen, Duy & Cui, Zhenyu, 2017. "A unified approach to Bermudan and barrier options under stochastic volatility models with jumps," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 75-100.
    2. Shi Qiu & Sovan Mitra, 2018. "Mathematical Properties Of American Chooser Options," Journal of Enterprising Culture (JEC), World Scientific Publishing Co. Pte. Ltd., vol. 21(08), pages 1-30, December.
    3. Jérôme Detemple, 2014. "Optimal Exercise for Derivative Securities," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 459-487, December.
    4. Lian, Yu-Min & Chen, Jun-Home, 2023. "Valuation of chooser options with state-dependent risks," Finance Research Letters, Elsevier, vol. 52(C).
    5. Anna Battauz & Marzia De Donno & Alessandro Sbuelz, 2015. "Real Options and American Derivatives: The Double Continuation Region," Management Science, INFORMS, vol. 61(5), pages 1094-1107, May.
    6. Tiziano De Angelis, 2020. "Stopping spikes, continuation bays and other features of optimal stopping with finite-time horizon," Papers 2009.01276, arXiv.org, revised Jan 2022.

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