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The pricing formula for cancellable European options

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  • Hsuan-Ku Liu

Abstract

This paper examines the value of a cancellable European option in a finite time horizon setting. The specifications of this generalized European option allow the seller to cancel the option at any point in time for a fixed penalty paid directly to the holder. Here, we provide an explicit valuation formula for the European game call where the early cancellation time is obtained iteratively.

Suggested Citation

  • Hsuan-Ku Liu, 2013. "The pricing formula for cancellable European options," Papers 1304.5962, arXiv.org, revised Sep 2014.
  • Handle: RePEc:arx:papers:1304.5962
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    References listed on IDEAS

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    1. Andreas Kyprianou, 2004. "Some calculations for Israeli options," Finance and Stochastics, Springer, vol. 8(1), pages 73-86, January.
    2. Yuri Kifer, 2000. "Game options," Finance and Stochastics, Springer, vol. 4(4), pages 443-463.
    3. Jan Kallsen & Christoph Kühn, 2004. "Pricing derivatives of American and game type in incomplete markets," Finance and Stochastics, Springer, vol. 8(2), pages 261-284, May.
    4. Christoph Kühn & Andreas E. Kyprianou, 2007. "Callable Puts As Composite Exotic Options," Mathematical Finance, Wiley Blackwell, vol. 17(4), pages 487-502.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 9(2), pages 207-211, June.
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