IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Alternative Characterizations of the European Continuous-Installment Option Valuation Problem

  • Ilir Roko
  • Pierangelo Ciurlia

This paper is concerned with the pricing of European continuous-installment options where the aim is to determine the initial premium given the installment payments schedule. The particular feature of this pricing problem is the determination, along with the initial premium, of an optimal stopping boundary since the option holder has the right to stop paying the installments at any time before maturity. Given that installments are paid continuously, it can be possible to derive the Black-Scholes differential equation satisfied by the initial value of the option. Using this key result, we obtain two alternative characterizations of the European continuous-installment option valuation problem, for which no closed-form solution is available. First, we formulate the pricing problem as a free boundary value problem and using the integral representation method we obtain integral expressions for both the initial premium and the optimal stopping boundary. Second, we use the variational inequality formulation of the pricing problem for determining the initial value and the early stopping curve implicitly. To solve the system of discretized linear complementarity problems we adopt a Newton method

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 221.

in new window

Date of creation: 11 Nov 2005
Date of revision:
Handle: RePEc:sce:scecf5:221
Contact details of provider: Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:221. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.