Pricing of American lookback spread options

Min Hyeok Woo and Geon Ho Choe

Stochastic Processes and their Applications, 2020, vol. 130, issue 10, 6300-6318

Abstract: We find the closed form formula for the price of the perpetual American lookback spread option, whose payoff is the difference of the running maximum and minimum prices of a single asset. We solve an optimal stopping problem related to both maximum and minimum. We show that the spread option is equivalent to some fixed strike options on some domains, find the exact form of the optimal stopping region, and obtain the solution of the resulting partial differential equations. The value function is not differentiable. However, we prove the verification theorem due to the monotonicity of the maximum and minimum processes.

Keywords: American option; Lookback spread option; Optimal stopping; Maximum and minimum processes (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:spapps:v:130:y:2020:i:10:p:6300-6318

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DOI: 10.1016/j.spa.2020.05.012

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