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On perpetual American strangles

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  • Franck Moraux

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper analyzes perpetual American strangles with no recourse to advanced numerical techniques. Our analytical approach rests on an analogy with asymmetric rebates of Double Knock-Out Barrier Options. The optimal exercise policy is modelled by a couple of boundaries that simultaneously solve a system of two non linear equations. Numerical investigations then highlight salient features of American strangles and compare them with portfolios of options which may be used as proxies. Overall, results show that these latter are significantly upward biased in terms of prices and that, more dramatically, they lead the holder to exercise inappropriately

Suggested Citation

  • Franck Moraux, 2009. "On perpetual American strangles," Post-Print halshs-00393811, HAL.
    • Handle: RePEc:hal:journl:halshs-00393811
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    References listed on IDEAS

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    1. Raphael Douady, 1999. "Closed Form Formulas For Exotic Options And Their Lifetime Distribution," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar, chapter 6, pages 177-202, World Scientific Publishing Co. Pte. Ltd..
    2. Gerber, Hans U. & Shiu, Elias S. W., 1994. "From perpetual strangles to Russian options," Insurance: Mathematics and Economics, Elsevier, vol. 15(2-3), pages 121-126, December.
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    4. Chiarella, Carl & Ziogas, Andrew, 2005. "Evaluation of American strangles," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 31-62, January.
    5. J. Scott Chaput & Louis H. Ederington, 2005. "Volatility trade design," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(3), pages 243-279, March.
    6. Kim, In Joon, 1990. "The Analytic Valuation of American Options," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 547-572.
    7. Roland Mallier & Ghada Alobaidi, 2000. "Laplace transforms and American options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(4), pages 241-256.
    8. Peter Carr & Robert Jarrow & Ravi Myneni, 2008. "Alternative Characterizations Of American Put Options," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 5, pages 85-103, World Scientific Publishing Co. Pte. Ltd..
    9. Gerber, Hans U. & Shiu, Elias S.W., 1994. "Martingale Approach to Pricing Perpetual American Options," ASTIN Bulletin, Cambridge University Press, vol. 24(2), pages 195-220, November.
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    Cited by:

    1. Obradović, Lazar, 2016. "A note on the perpetual American straddle," Center for Mathematical Economics Working Papers 559, Center for Mathematical Economics, Bielefeld University.
    2. Xuemei Gao & Dongya Deng & Yue Shan, 2014. "Lattice Methods for Pricing American Strangles with Two-Dimensional Stochastic Volatility Models," Discrete Dynamics in Nature and Society, Hindawi, vol. 2014, pages 1-6, April.
    3. Laminou Abdou, Souleymane & Moraux, Franck, 2016. "Pricing and hedging American and hybrid strangles with finite maturity," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 112-125.
    4. Jeon, Junkee & Kim, Geonwoo, 2019. "Pricing European continuous-installment strangle options," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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