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Pricing and hedging American and hybrid strangles with finite maturity

Author

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  • Souleymane Laminou Abdou

    (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)

  • 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 introduces variants of strangles, called Euro-American or hybrid strangles, and it promotes a new numerical pricing technique. We highlight and compare the properties of European, American, and hybrid strangles with pricing and hedging in mind. The new quadrature approach we propose can account for systems of coupled integral equations that locate the early exercise boundaries of finite-lived contracts. We show that this method is efficient, accurate, and fast for pricing all types of early exercisable strangles. Other advantages of this technique are that it avoids the non-monotonic gradient problem faced by others and it allows users to control for errors. We then investigate the hedging of all strangles, we derive analytical expressions for some Greek parameters, and we stress how these parameters can differ (or not) from each other.

Suggested Citation

  • Souleymane Laminou Abdou & Franck Moraux, 2016. "Pricing and hedging American and hybrid strangles with finite maturity," Post-Print halshs-01242610, HAL.
    • Handle: RePEc:hal:journl:halshs-01242610
    DOI: 10.1016/j.jbankfin.2015.10.003
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01242610
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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.
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    Cited by:

    1. Detemple, Jérôme & Laminou Abdou, Souleymane & Moraux, Franck, 2020. "American step options," European Journal of Operational Research, Elsevier, vol. 282(1), pages 363-385.
    2. Tsvetelin S. Zaevski, 2023. "American strangle options with arbitrary strikes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(7), pages 880-903, July.
    3. Liu, Yanchu & Cui, Zhenyu & Zhang, Ning, 2016. "Integral representation of vega for American put options," Finance Research Letters, Elsevier, vol. 19(C), pages 204-208.
    4. Jeon, Junkee & Kim, Geonwoo, 2019. "Pricing European continuous-installment strangle options," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    5. Weiping Li & Su Chen, 2018. "The Early Exercise Premium In American Options By Using Nonparametric Regressions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(07), pages 1-29, November.

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    More about this item

    Keywords

    American strangles; early exercise boundaries; Kim representation; numerical integration; greek parameters;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

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