Guo, Xin and Zervos, Mihail (2010) Pi options. Stochastic processes and their applications, 120 (7). pp. 1033-1059. ISSN 0304-4149
We consider a discretionary stopping problem that arises in the context of pricing a class of perpetual American-type call options, which include the perpetual American, Russian and lookback-American call options as special cases. We solve this genuinely two-dimensional optimal stopping problem by means of an explicit construction of its value function. In particular, we fully characterise the free-boundary that provides the optimal strategy, and which involves the analysis of a highly nonlinear ordinary differential equation (ODE). In accordance with other optimal stopping problems involving a running maximum process that have been studied in the literature, it turns out that the associated variational inequality has an uncountable set of solutions that satisfy the so-called principle of smooth fit.
|Additional Information:||© 2010 Elsevier B.V.|
|Library of Congress subject classification:||Q Science > QA Mathematics|
|Sets:||Departments > Mathematics|
|Identification Number:||UT ISI:000278394600002|
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