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DOI10.1007/S00780-016-0319-XzbMATH Open1380.91134DBLPjournals/fs/RodosthenousZ17arXiv1609.07419OpenAlexW3038104323WikidataQ59615562 ScholiaQ59615562MaRDI QIDQ503393FDOQ503393

Authors: Neofytos Rodosthenous, Mihail Zervos 

Publication date: 12 January 2017

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: We consider a new family of derivatives whose payoffs become strictly positive when the price of their underlying asset falls relative to its historical maximum. We derive the solution to the discretionary stopping problems arising in the context of pricing their perpetual American versions by means of an explicit construction of their value functions. In particular, we fully characterise the free-boundary functions that provide the optimal stopping times of these genuinely two-dimensional problems as the unique solutions to highly non-linear first order ODEs that have the characteristics of a separatrix. The asymptotic growth of these free-boundary functions can take qualitatively different forms depending on parameter values, which is an interesting new feature.

Full work available at URL: https://arxiv.org/abs/1609.07419

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zbMATH Keywords

optimal stopping problemseparatrixperpetual American optionhighly nonlinear differential equationrunning maximum processtwo-dimensional free-boundary problemwatermark option

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40) Martingales with continuous parameter (60G44)

Cites Work

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Cited In (9)

• Optimal stopping problems for maxima and minima in models with asymmetric information
• Optimal stopping problems for running minima with positive discounting rates
• Perpetual American double lookback options on drawdowns and drawups with floating strikes
• Performance fees with stochastic benchmark
• Pricing American drawdown options under Markov models
• Discounted optimal stopping problems for maxima of geometric Brownian motions with switching payoffs
• Optimal double stopping problems for maxima and minima of geometric Brownian motions
• Discounted optimal stopping problems in first-passage time models with random thresholds
• Perpetual American Standard and Lookback Options with Event Risk and Asymmetric Information

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