Holder-extendible European option: corrections and extensions

Pavel V. Shevchenko

Papers from arXiv.org

Abstract: Financial contracts with options that allow the holder to extend the contract maturity by paying an additional fixed amount found many applications in finance. Closed-form solutions for the price of these options have appeared in the literature for the case when the contract underlying asset follows a geometric Brownian motion with the constant interest rate, volatility, and non-negative "dividend" yield. In this paper, the option price is derived for the case of the underlying asset that follows a geometric Brownian motion with the time-dependent drift and volatility which is important to use the solutions in real life applications. The formulas are derived for the drift that may include non-negative or negative "dividend" yield. The latter case results in a new solution type that has not been studied in the literature. Several typographical errors in the formula for the holder-extendible put, typically repeated in textbooks and software, are corrected.

Date: 2010-10, Revised 2014-09
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Published in The ANZIAM Journal 56 (2015) 359-372

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1010.0090

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