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Valuing finite-lived Russian options

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  • Kimura, Toshikazu

Abstract

This paper deals with the valuation of the Russian option with finite time horizon in the framework of the Black-Scholes-Merton model. On the basis of the PDE approach to a parabolic free boundary problem, we derive Laplace transforms of the option value, the early exercise boundary and some hedging parameters. Using Abelian theorems of Laplace transforms, we characterize the early exercise boundary at a time to close to expiration as well as the well-known perpetual case in a unified way. Furthermore, we obtain a symmetric relation in the perpetual early exercise boundary. Combining the Gaver-Stehfest inversion method and the Newton method, we develop a fast algorithm for computing both the option value and the early exercise boundary in the finite time horizon.

Suggested Citation

  • Kimura, Toshikazu, 2008. "Valuing finite-lived Russian options," European Journal of Operational Research, Elsevier, vol. 189(2), pages 363-374, September.
    • Handle: RePEc:eee:ejores:v:189:y:2008:i:2:p:363-374
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    References listed on IDEAS

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    1. Carr, Peter, 1998. "Randomization and the American Put," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 597-626.
    2. Asmussen, Søren & Avram, Florin & Pistorius, Martijn R., 2004. "Russian and American put options under exponential phase-type Lévy models," Stochastic Processes and their Applications, Elsevier, vol. 109(1), pages 79-111, January.
    3. D. P. Gaver, 1966. "Observing Stochastic Processes, and Approximate Transform Inversion," Operations Research, INFORMS, vol. 14(3), pages 444-459, June.
    4. Duistermaat, J.J. & Kyprianou, A.E. & van Schaik, K., 2005. "Finite expiry Russian options," Stochastic Processes and their Applications, Elsevier, vol. 115(4), pages 609-638, April.
    5. Goran Peskir, 2005. "The Russian option: Finite horizon," Finance and Stochastics, Springer, vol. 9(2), pages 251-267, April.
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    1. Kimura, Toshikazu, 2010. "Valuing continuous-installment options," European Journal of Operational Research, Elsevier, vol. 201(1), pages 222-230, February.
    2. Zhiqiang Zhou & Hongying Wu, 2018. "Laplace Transform Method for Pricing American CEV Strangles Option with Two Free Boundaries," Discrete Dynamics in Nature and Society, Hindawi, vol. 2018, pages 1-12, September.

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