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Early exercise boundaries for American-style knock-out options
Journal Title
European Journal of Operational Research
Year (definitive publication)
2020
Language
English
Country
Netherlands
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Abstract
This paper proposes a novel representation for the early exercise boundary of American-style double knock-out options in terms of the simpler optimal stopping boundary of a nested single barrier contract. Such representation only requires the existence, continuity and monotonicity (in time) of the nested single barrier exercise boundary, and these requirements are proved for the whole class of single-factor exponential-Lévy processes. To illustrate the practical relevance of our results, a new put-call duality relation is obtained, a real options application is provided and the Fourier space time-stepping method, the COS approximation, and the static hedging portfolio approach are all adapted to the valuation of American-style double knock-out options.
Acknowledgements
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Keywords
Finance,American-style knock-out options,Real options,Put-call duality,Lévy processes
Fields of Science and Technology Classification
- Mathematics - Natural Sciences
- Computer and Information Sciences - Natural Sciences
- Economics and Business - Social Sciences
- Other Social Sciences - Social Sciences
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