Bottleneck options
In the spirit of Kyprianou and Ott (in Acta Appl. Math., to appear, <CitationRef CitationID="CR11">2013</CitationRef>) and Ott (in Ann. Appl. Probab. 23:2327–2356, <CitationRef CitationID="CR15">2013</CitationRef>) we consider an option whose payoff corresponds to a capped American lookback option with floating strike and solve the associated pricing problem (an optimal stopping problem) in a financial market whose price process is modelled by an exponential spectrally negative Lévy process. Despite the simple interpretation of the cap as a moderation of the payoff, it turns out that the optimal strategy to exercise the option looks very different compared to the situation without a cap. In fact, we show that the continuation region has a feature that resembles a bottleneck and hence the name “bottleneck option”. Copyright Springer-Verlag Berlin Heidelberg 2014
Year of publication: |
2014
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Authors: | Ott, Curdin |
Published in: |
Finance and Stochastics. - Springer. - Vol. 18.2014, 4, p. 845-872
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Publisher: |
Springer |
Subject: | Bottleneck option | Optimal stopping | Principle of smooth and continuous fit | Lévy processes | Scale functions |
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