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Pricing of American lookback spread options

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  • Woo, Min Hyeok
  • Choe, Geon Ho

Abstract

We find the closed form formula for the price of the perpetual American lookback spread option, whose payoff is the difference of the running maximum and minimum prices of a single asset. We solve an optimal stopping problem related to both maximum and minimum. We show that the spread option is equivalent to some fixed strike options on some domains, find the exact form of the optimal stopping region, and obtain the solution of the resulting partial differential equations. The value function is not differentiable. However, we prove the verification theorem due to the monotonicity of the maximum and minimum processes.

Suggested Citation

  • Woo, Min Hyeok & Choe, Geon Ho, 2020. "Pricing of American lookback spread options," Stochastic Processes and their Applications, Elsevier, vol. 130(10), pages 6300-6318.
    • Handle: RePEc:eee:spapps:v:130:y:2020:i:10:p:6300-6318
    DOI: 10.1016/j.spa.2020.05.012
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    References listed on IDEAS

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    1. Conze, Antoine & Viswanathan, 1991. "Path Dependent Options: The Case of Lookback Options," Journal of Finance, American Finance Association, vol. 46(5), pages 1893-1907, December.
    2. Peter Buchen & Otto Konstandatos, 2005. "A New Method Of Pricing Lookback Options," Mathematical Finance, Wiley Blackwell, vol. 15(2), pages 245-259, April.
    3. Goran Peskir, 2005. "The Russian option: Finite horizon," Finance and Stochastics, Springer, vol. 9(2), pages 251-267, April.
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    Cited by:

    1. Zhenya Liu & Yuhao Mu, 2022. "Optimal Stopping Methods for Investment Decisions: A Literature Review," IJFS, MDPI, vol. 10(4), pages 1-23, October.
    2. Deng, Guohe, 2020. "Pricing perpetual American floating strike lookback option under multiscale stochastic volatility model," Chaos, Solitons & Fractals, Elsevier, vol. 141(C).
    3. Zaevski, Tsvetelin S., 2022. "Pricing discounted American capped options," Chaos, Solitons & Fractals, Elsevier, vol. 156(C).

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