
Open access
Author
Date
2014-10Type
- Journal Article
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”. Show more
Permanent link
https://doi.org/10.3929/ethz-b-000073452Publication status
publishedExternal links
Journal / series
Finance and StochasticsVolume
Pages / Article No.
Publisher
SpringerSubject
Bottleneck option; Optimal stopping; Principle of smooth and continuous fit; Lévy processes; Scale functionsOrganisational unit
03288 - Embrechts, Paul (emeritus) / Embrechts, Paul (emeritus)
Notes
It was possible to publish this article open access thanks to a Swiss National Licence with the publisher.More
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