American options with acceleration clauses

Anna Battauz () and Sara Staffolani ()
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Anna Battauz: Bocconi University
Sara Staffolani: Bocconi University

Decisions in Economics and Finance, 2025, vol. 48, issue 1, No 3, 13-35

Abstract: Abstract Acceleration clauses shorten the residual life of an option when an acceleration condition is met. Acceleration clauses are frequent in warrants, American call options on traded stocks. In warrants with the acceleration clause, if an index (e.g. the average underlying stock) triggers an acceleration threshold, the American call option can be exercised on a much shorter maturity (e.g. 30 days). The actual time-to-maturity of an American option with an acceleration condition is therefore stochastic. In order to evaluate these contracts we first reduce the generic American option with stochastic time-to-maturity to a compound American option with constant maturity, and provide estimates for their prices. Finally we propose an efficient algorithm to price American call options with the acceleration clause in a binomial setting.

Keywords: Optimal stopping; American options; Acceleration clauses; Warrants; Backward recursion (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10203-024-00446-0

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