A PDE View of Games Options

Gunter H Meyer
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Gunter H Meyer: Georgia Institute of Technology

No 369, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Game put and call options are defined and solved with an approach based on differential equations which completely bypasses their usual treatment as stochastic Dynkin games. The view is taken that when the writer of the option plans to cancel an American put or call at particular values of the underlying asset, then those assets function as twosided barriers for the cancellable option. A game option results when the location of the barriers is chosen such that the value of the option is minimized. With elementary maximum and comparison principles from differential equations, optimal cancellation strategies can be readily found and interpreted graphically for perpetual options. An analogous treatment appears possible for finite time game options. An application of the approach to an American game CEV call and to callable stock loans is described.

Pages: 27 pages
Date: 2016-03-01
New Economics Papers: this item is included in nep-hpe
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Citations: View citations in EconPapers (2)

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