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The Russian option: Finite horizon

Author

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  • Goran Peskir

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Abstract

We show that the optimal stopping boundary for the Russian option with finite horizon can be characterized as the unique solution of a nonlinear integral equation arising from the early exercise premium representation (an explicit formula for the arbitrage-free price in terms of the optimal stopping boundary having a clear economic interpretation). The results obtained stand in a complete parallel with the best known results on the American put option with finite horizon. The key argument in the proof relies upon a local time-space formula. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Goran Peskir, 2005. "The Russian option: Finite horizon," Finance and Stochastics, Springer, vol. 9(2), pages 251-267, April.
  • Handle: RePEc:spr:finsto:v:9:y:2005:i:2:p:251-267
    DOI: 10.1007/s00780-004-0133-8
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    File URL: http://hdl.handle.net/10.1007/s00780-004-0133-8
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    Citations

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    Cited by:

    1. Yerkin Kitapbayev, 2015. "The British Lookback Option with Fixed Strike," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(3), pages 238-260, July.
    2. de Angelis, Tiziano & Ferrari, Giorgio, 2014. "A Stochastic Reversible Investment Problem on a Finite-Time Horizon: Free Boundary Analysis," Center for Mathematical Economics Working Papers 477, Center for Mathematical Economics, Bielefeld University.
    3. Gapeev, P.V. & Peskir, G., 2006. "The Wiener disorder problem with finite horizon," Stochastic Processes and their Applications, Elsevier, vol. 116(12), pages 1770-1791, December.
    4. Kimura, Toshikazu, 2008. "Valuing finite-lived Russian options," European Journal of Operational Research, Elsevier, vol. 189(2), pages 363-374, September.
    5. Tiziano De Angelis & Erik Ekstrom, 2016. "The dividend problem with a finite horizon," Papers 1609.01655, arXiv.org, revised Nov 2017.
    6. 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.

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