In this paper we study perpetual American call and put options in an exponential Levy model. We consider a negative effective discount rate which arises in a number of financial applications including stock loans and real options, where the strike price can potentially grow at a higher rate than the original discount factor. We show that in this case a double continuation region arises and we identify the two critical prices. We also generalize this result to multiple stopping problems of Swing type, that is, when successive exercise opportunities are separated by i.i.d. random refraction times. We conduct an extensive numerical analysis for the Black-Scholes model and the jump-diffusion model with exponentially distributed jumps.

Double continuation regions for American and Swing options with negative discount rate in Levy models / DE DONNO, Marzia; Palmowski, Zbigniew; Tumilewicz, Joanna. - In: MATHEMATICAL FINANCE. - ISSN 0960-1627. - (2019). [10.1111/mafi.12218]

Double continuation regions for American and Swing options with negative discount rate in Levy models

Marzia De Donno;
2019-01-01

Abstract

In this paper we study perpetual American call and put options in an exponential Levy model. We consider a negative effective discount rate which arises in a number of financial applications including stock loans and real options, where the strike price can potentially grow at a higher rate than the original discount factor. We show that in this case a double continuation region arises and we identify the two critical prices. We also generalize this result to multiple stopping problems of Swing type, that is, when successive exercise opportunities are separated by i.i.d. random refraction times. We conduct an extensive numerical analysis for the Black-Scholes model and the jump-diffusion model with exponentially distributed jumps.
2019
Double continuation regions for American and Swing options with negative discount rate in Levy models / DE DONNO, Marzia; Palmowski, Zbigniew; Tumilewicz, Joanna. - In: MATHEMATICAL FINANCE. - ISSN 0960-1627. - (2019). [10.1111/mafi.12218]
File in questo prodotto:
File Dimensione Formato  
double_regionrevrevprint.pdf

accesso aperto

Tipologia: Documento in Pre-print
Licenza: Creative commons
Dimensione 916.88 kB
Formato Adobe PDF
916.88 kB Adobe PDF Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11381/2854983
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 10
  • ???jsp.display-item.citation.isi??? 10
social impact