AMERICAN OPTIONS WITH GRADUAL EXERCISE UNDER PROPORTIONAL TRANSACTION COSTS

Alet Roux () and Tomasz Zastawniak ()
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Alet Roux: Department of Mathematics, University of York, Heslington, York YO10 5DD, UK
Tomasz Zastawniak: Department of Mathematics, University of York, Heslington, York YO10 5DD, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 08, 1-36

Abstract: American options in a multi-asset market model with proportional transaction costs are studied in the case when the holder of an option is able to exercise it gradually at a so-called mixed (randomized) stopping time. The introduction of gradual exercise leads to tighter bounds on the option price when compared to the case studied in the existing literature, where the standard assumption is that the option can only be exercised instantly at an ordinary stopping time. Algorithmic constructions for the bid and ask prices and the associated superhedging strategies and optimal mixed stopping times for an American option with gradual exercise are developed and implemented, and dual representations are established.

Keywords: American options; transaction costs; mixed stopping times; superhedging; dual representation (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024914500526

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