Minimum Guaranteed Payments and Costly Cancellation Rights: A Stopping Game Perspective

Luis Alvarez

No 12, Discussion Papers from Aboa Centre for Economics

Abstract: We consider the valuation and optimal exercise policy of a δ- penalty minimum guaranteed payment option in the case where the value of the underlying dividend-paying asset follows a linear diffusion. We characterize both the value and optimal exercise policy of the considered game option explicitly and demonstrate that increased volatility increases the value of the option and postpones exercise by expanding the continuation region where exercising is suboptimal. An interesting and natural implication of this finding is that the value of the embedded cancellation rights of the issuer increase as volatility increases.

Keywords: minimum guaranteed payment; δ-penalty options; Dynkin games; linear diffusions (search for similar items in EconPapers)
JEL-codes: C61 C73 G12 (search for similar items in EconPapers)
Pages: 29
Date: 2006-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.ace-economics.fi/kuvat/ACE12%20Alvarez.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tkk:dpaper:dp12

Access Statistics for this paper

More papers in Discussion Papers from Aboa Centre for Economics Contact information at EDIRC.
Bibliographic data for series maintained by Susmita Baulia ().