Bottleneck options

Curdin Ott ()

Finance and Stochastics, 2014, vol. 18, issue 4, 845-872

Abstract: In the spirit of Kyprianou and Ott (in Acta Appl. Math., to appear, 2013 ) and Ott (in Ann. Appl. Probab. 23:2327–2356, 2013 ) we consider an option whose payoff corresponds to a capped American lookback option with floating strike and solve the associated pricing problem (an optimal stopping problem) in a financial market whose price process is modelled by an exponential spectrally negative Lévy process. Despite the simple interpretation of the cap as a moderation of the payoff, it turns out that the optimal strategy to exercise the option looks very different compared to the situation without a cap. In fact, we show that the continuation region has a feature that resembles a bottleneck and hence the name “bottleneck option”. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Bottleneck option; Optimal stopping; Principle of smooth and continuous fit; Lévy processes; Scale functions; 60G40; 60G51; 60J75; G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00780-013-0222-7 (text/html)
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:spr:finsto:v:18:y:2014:i:4:p:845-872

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-013-0222-7

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().