Local time, coupling and the passport option
A passport option, as introduced and marketed by Bankers Trust, is a call option on the balance of a trading account. The strategy that this account follows is chosen by the option holder, subject to position limits. We derive a simplified form for the price of the passport option using local time. A key insight is that Tanaka's formula and the Skorokhod Lemma allow us to prove a direct relationship between the prices of passport and lookback options. Explicit calculations are provided in the case where the underlying is an exponential Brownian motion. A further issue in the analysis of passport options is the identification of the optimal strategy. The second contribution of this article is to extend existing results on the form of the optimal strategy from the exponential Brownian motion model to a wide class of alternative price processes. We achieve this using coupling arguments.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 4 (2000)
Issue (Month): 1 ()
|Note:||received: August 1998; final version received: December 1998|
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/mathematics/quantitative+finance/journal/780/PS2|
When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:4:y:2000:i:1:p:69-80. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.