Abstract
The step option is a special contact whose value decreases gradually in proportional to the spending time outside a barrier of the asset price.
European step options were introduced and studied by Linetsky [11] and Davydov et al. [2]. This paper considers American step options, including perpetual
case and finite expiration time case. In perpetual case, we find that the optimal
exercise time is the first crossing time of the optimal level. The closed price
formula for perpetual step option could be derived through Feynman-Kac formula. As for the latter, we present a system of variational inequalities satisfied
by the option price. Using the explicit finite difference method we could get
the numerical option price.
European step options were introduced and studied by Linetsky [11] and Davydov et al. [2]. This paper considers American step options, including perpetual
case and finite expiration time case. In perpetual case, we find that the optimal
exercise time is the first crossing time of the optimal level. The closed price
formula for perpetual step option could be derived through Feynman-Kac formula. As for the latter, we present a system of variational inequalities satisfied
by the option price. Using the explicit finite difference method we could get
the numerical option price.
| Original language | English |
|---|---|
| Pages (from-to) | 549-560 |
| Journal | Journal of Industrial and Management Optimization |
| Volume | 9 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2013 |
| Externally published | Yes |