The Russian option: Finite horizon

Goran Peskir ()

Finance and Stochastics, 2005, vol. 9, issue 2, 267 pages

Abstract: We show that the optimal stopping boundary for the Russian option with finite horizon can be characterized as the unique solution of a nonlinear integral equation arising from the early exercise premium representation (an explicit formula for the arbitrage-free price in terms of the optimal stopping boundary having a clear economic interpretation). The results obtained stand in a complete parallel with the best known results on the American put option with finite horizon. The key argument in the proof relies upon a local time-space formula. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Russian option; finite horizon; arbitrage-free price; optimal stopping; smooth-fit; geometric Brownian motion; free-boundary problem; nonlinear integral equation; local time-space calculus; curved boundary (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (18)

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DOI: 10.1007/s00780-004-0133-8

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