Optimal stopping and perpetual options for Lévy processes (Q1424694): Difference between revisions

The author considers a model of a financial market with a stock driven by a Lévy process \(X=\{X_t\}_{t\geq0}\) and constant interest rate. In order to obtain process and optimal exercise times he finds solutions for the optimal stopping problems with call and put rewards and Lévy processes as log-prices. To introduce the obtained results consider \(M=\sup_{0\leq t\leq\tau(r)}X_t\) and \(I=\inf_{0\leq t\leq\tau(r)}X_t\), where \(\tau(r)\) is an exponential random variable with parameter \(r>0\), independent of \(\{X_t\}\). The first result of the paper gives closed solutions for prices and optimal exercise times of the perpetual American call options under the given probability measure for general Lévy process in terms of the overall supremum \(M\) of the Lévy process, and a corresponding closed formula for the perpetual American put options involving the infimum \(I\) of the Lévy process. A first consequence of the obtained results is a Black-Scholes type formula for perpetual options. Also as a consequence, simple explicit formulas for prices of call options are obtained for a Lévy process with positive mixed-exponential and arbitrary negative jumps. In the case of put options, similar simple formulas are obtained under the condition of negative mixed-exponential and arbitrary positive jumps. Risk-neutral valuation and a simple model with Brownian component and positive and negative jumps exponentially distributed is considered in order to illustrate the results.