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American Capped Call Options on Dividend Paying Assets

  • Mark Broadie
  • Jérôme B. Detemple
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    This paper addresses the problem of valuing American call options with caps on dividend paying assets. Since early exercise is allowed, the valuation problem requires the determination of optimal exercise policies. Options with two types of caps are analyzed: constant caps and caps with a constant growth rate. For constant caps the optimal exercise policy is to exercise at the first time at which the underlying asset's price equals or exceeds the minimum of the cap and the optimal exercise boundary for the corresponding uncapped option. For caps that grow at a constant rate the optimal exercise strategy can be specified by three endogeneous parameters. La présente étude a pour objet la valorisation des options d'achat américaines avec plafonds sur les actifs générateurs de dividendes. Comme le détenteur de l'option peut l'exercer avant l'expiration, la solution au problème de valorisation exige la détermination des politiques d'exercice optimales. Deux types de plafonds sont envisagés : les plafonds constants et les plafonds dotés d'un taux de croissance constant. Lorsque le plafond est constant, la politique optimale consiste à exercer l'option dès que le prix de l'actif sous-jacent est égal ou supérieur au minimum du plafond et de la frontière d'exercice optimale de l'option non plafonnée correspondante. Lorsque le plafond croît à un taux constant, la stratégie d'exercice optimale peut être spécifiée à partir de trois paramètres endogènes.

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    File URL: http://www.cirano.qc.ca/files/publications/94s-01.pdf
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    Paper provided by CIRANO in its series CIRANO Working Papers with number 94s-01.

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    Length: 37 pages
    Date of creation: 01 Jan 1994
    Date of revision:
    Handle: RePEc:cir:cirwor:94s-01
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