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Perpetual American double lookback options on drawdowns and drawups with floating strikes

Gapeev, Pavel V. (2022) Perpetual American double lookback options on drawdowns and drawups with floating strikes. Methodology and Computing in Applied Probability, 24 (2). 749 - 788. ISSN 1387-5841

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Identification Number: 10.1007/s11009-021-09917-y

Abstract

We present closed-form solutions to the problems of pricing of the perpetual American double lookback put and call options on the maximum drawdown and the maximum drawup with floating strikes in the Black-Merton-Scholes model. It is shown that the optimal exercise times are the first times at which the underlying risky asset price process reaches some lower or upper stochastic boundaries depending on the current values of its running maximum or minimum as well as the maximum drawdown or maximum drawup. The proof is based on the reduction of the original double optimal stopping problems to the appropriate sequences of single optimal stopping problems for the three-dimensional continuous Markov processes. The latter problems are solved as the equivalent free-boundary problems by means of the smooth-fit and normal-reflection conditions for the value functions at the optimal stopping boundaries and the edges of the three-dimensional state spaces. We show that the optimal exercise boundaries are determined as either the unique solutions of the associated systems of arithmetic equations or the minimal and maximal solutions of the appropriate first-order nonlinear ordinary differential equations.

Item Type: Article
Official URL: https://www.springer.com/journal/11009
Additional Information: © 2022 The Author
Divisions: Mathematics
Subjects: Q Science > QA Mathematics
Date Deposited: 26 Oct 2021 12:15
Last Modified: 18 Jul 2022 08:09
URI: http://eprints.lse.ac.uk/id/eprint/112501

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