Optimal stopping problems for running minima with positive discounting rates (Q2216971): Difference between revisions

The main aim of this paper is to get analytic solutions to the discounted optimal stopping problems of \(V_*(x, y) = \inf_{\tau}\textbf{E}_{x,y}[\exp\{r\tau\}(Y_\tau+L)]\) and \(W_*(x, y) = \inf_{\xi}\textbf{E}_{x,y}[\exp\{r\xi\}(Y_\xi+L X_\xi)]\) for the running minimum \(Y\) associated with the process \(X\) defined as \(X_t = x \exp((\mu-\frac{\sigma^2}{2})t + \sigma B_t)\), where \(B\) is a standard Brownian motion, with exponential positive discounting rates which problems are generalisation those considered, e.g., by \textit{L. A. Shepp} and \textit{A. N. Shiryaev} [in: Probability theory and mathematical statistics. Lectures presented at the semester held in St. Petersburg, Russia, March 2--April 23, 1993. Amsterdam: Gordon and Breach Publishers. 209--218 (1996; Zbl 0867.90014)], the author [``Solving the dual Russian option problem by using change-of-measure arguments'', High Freq. 2, No. 2, 76--84, (2019; \url{doi:10.1002/hf2.10030})]. The proof is based on the reduction of the original problems to the associated free boundary problems and the solution of the latter problems by means of the smooth-fit and normal-reflection conditions. It is shown that the optimal stopping boundaries are determined as the minimal solutions of certain first-order nonlinear ordinary differential equations. The obtained results are related to the valuation of perpetual dual American lookback options with fixed and floating strikes in the Black-Merton-Scholes model from the point of view of short sellers.