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2007.37: The Russian option: Finite horizon

2007.37: Goran Peskir (2005) The Russian option: Finite horizon. Finance and Stochastics, 9 (2). pp. 251-267. ISSN 1432-1122

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DOI: 10.1007/s00780-004-0133-8

Abstract

We show that the optimal stopping boundary for the Russian option with finite horizon can be characterized as the unique solution of a nonlinear integral equation arising from the early exercise premium representation (an explicit formula for the arbitrage-free price in terms of the optimal stopping boundary having a clear economic interpretation). The results obtained stand in a complete parallel with the best known results on the American put option with finite horizon. The key argument in the proof relies upon a local time-space formula.

Item Type:Article
Uncontrolled Keywords:Russian option - finite horizon - arbitrage-free price - optimal stopping - smooth-fit - geometric Brownian motion - free-boundary problem - nonlinear integral equation - local time-space calculus - curved boundary
Subjects:MSC 2000 > 35 Partial differential equations
MSC 2000 > 45 Integral equations
MSC 2000 > 60 Probability theory and stochastic processes
MSC 2000 > 91 Game theory, economics, social and behavioral sciences
MIMS number:2007.37
Deposited By:Miss Louise Stait
Deposited On:29 March 2007

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