On the pricing of options written on the last exit time (Q1041303)

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On the pricing of options written on the last exit time
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    On the pricing of options written on the last exit time (English)
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    2 December 2009
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    The well-known Madan-Roynette-Yor formulae [\textit{D. Madan, B. Roynette, M. Yor}, Asia-Pac. Financ. Mark. 15, No. 2, 97-115 (2008; Zbl 1163.91414)] give a probabilistic description of the Black--Scholes formula in terms of the distribution function of a last exit time. The purpose of the present article is to establish these formulae for the last exit time with finite time horizon and for geometric Brownian motion. The main theorem gives a description of a perfect hedging strategy for the Black-Scholes model. The result is explained roughly as follows: an option written on the last exit time with finite horizon can be hedged by holding a plain vanilla option and an exotic option.
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    Brownian motion
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    Black-Scholes model
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    option pricing
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    last exit time
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