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Simpler proofs in finance and shout options

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  • L. Ramprasath

Abstract

In the discrete binomial model for option pricing, the price of an American option is obtained using a backward recursion algorithm. However, the currently available justification for this algorithm is long and circuitous. Similarly, the key result used in the justification for antithetic sampling is not proved in standard financial texts. The proof is relegated to an older article, where the required result is masked by general details about association of random variables. This article gives self-contained, considerably simpler, proofs for both these basic results and extends these results to more general applications. In particular, it settles the question of optimality of early shouting for the buyer of Shout call options.

Suggested Citation

  • L. Ramprasath, 2011. "Simpler proofs in finance and shout options," Applied Economics Letters, Taylor & Francis Journals, vol. 18(2), pages 173-178.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:2:p:173-178
    DOI: 10.1080/13504850903493189
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    References listed on IDEAS

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    1. Min Dai & Yue Kuen Kwok & Li Xin Wu, 2003. "Options with Multiple Reset Rights," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(06), pages 637-653.
    2. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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