PENALTY AMERICAN OPTIONS

Ziwei Ke () and Joanna Goard ()
Additional contact information
Ziwei Ke: School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW 2522, Australia
Joanna Goard: School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW 2522, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 02, 1-32

Abstract: We present a new American-style option whereby on the event of exercise before expiry, the holder pays the writer a fee (which will be referred to as a ‘penalty’). The valuation of the option is not straightforward as it involves determining when it is optimal for the holder to exercise the option, leading to a free boundary problem. As most options in the traded markets have short maturities, accurate and fast valuations of such options are important. We derive analytic approximations for the value of the option with short times to expiry (up to 3 months) and its optimal exercise boundary. Some properties of the option, such as the put–call relationship, are explored as well. Numerical experiments suggest that our solutions both for the optimal exercise boundary and option value provide very accurate results.

Keywords: Penalty American option; option pricing; optimal exercise boundary (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024919500018
Access to full text is restricted to subscribers

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:wsi:ijtafx:v:22:y:2019:i:02:n:s0219024919500018

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024919500018

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().