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American Capped Call Options on Dividend Paying Assets

Author

Listed:
  • Broadie, M.
  • Detemple, J.

Abstract

This article 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, it is optimal 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 endogenous parameters. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
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Suggested Citation

  • Broadie, M. & Detemple, J., 1993. "American Capped Call Options on Dividend Paying Assets," Papers 93-08a, Columbia - Graduate School of Business.
    • Handle: RePEc:fth:colubu:93-08a
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    Keywords

    financial market;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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