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Valuing rebate options and equity-linked products

Author

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  • Lee, Hangsuck
  • Jeong, Himchan
  • Lee, Gaeun

Abstract

In this article, we propose rebate options with multi-step barriers, which are an extension of rebate options with a constant barrier. Despite the applicability and marketability of rebate options, there have been only a few research on obtaining analytical formulas. Accordingly, in this paper, we derive closed-form pricing formulas for these options under the Black–Scholes framework. The rebate options with multi-step barriers allow a flexible barrier structure, and thus we propose complex equity-linked products embedded with rebate options with barriers and derive pricing formulas for them. We conduct numerical studies on the pricing of rebate options with multi-step barriers, equity-linked securities, and equity-indexed annuities. The numerical studies validate the prices obtained from the pricing formulas.

Suggested Citation

  • Lee, Hangsuck & Jeong, Himchan & Lee, Gaeun, 2023. "Valuing rebate options and equity-linked products," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000918
    DOI: 10.1016/j.najef.2023.101968
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    References listed on IDEAS

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    1. Lee, Hangsuck & Ko, Bangwon & Song, Seongjoo, 2019. "Valuing step barrier options and their icicled variations," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 396-411.
    2. Christian Knoller & Gunther Kraut & Pascal Schoenmaekers, 2016. "On the Propensity to Surrender a Variable Annuity Contract: An Empirical Analysis of Dynamic Policyholder Behavior," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(4), pages 979-1006, December.
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    Cited by:

    1. Lee, Hangsuck & Ha, Hongjun & Lee, Gaeun & Lee, Minha, 2024. "Valuing American options using multi-step rebate options," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Rebate options; Reflection principle; Multi-step reflection principle; Equity-indexed annuities; Equity-linked securities;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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