Valuing rebate options and equity-linked products

Hangsuck Lee, Himchan Jeong and Gaeun Lee

The North American Journal of Economics and Finance, 2023, vol. 68, issue C

Abstract: In this article, we propose rebate options with multi-step barriers, which are an extension of rebate options with a constant barrier. Despite the applicability and marketability of rebate options, there have been only a few research on obtaining analytical formulas. Accordingly, in this paper, we derive closed-form pricing formulas for these options under the Black–Scholes framework. The rebate options with multi-step barriers allow a flexible barrier structure, and thus we propose complex equity-linked products embedded with rebate options with barriers and derive pricing formulas for them. We conduct numerical studies on the pricing of rebate options with multi-step barriers, equity-linked securities, and equity-indexed annuities. The numerical studies validate the prices obtained from the pricing formulas.

Keywords: Rebate options; Reflection principle; Multi-step reflection principle; Equity-indexed annuities; Equity-linked securities (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000918

DOI: 10.1016/j.najef.2023.101968

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