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Various Passport Options and Their Valuation

Author

Listed:
  • H. Ahn
  • A. Penaud
  • P. Wilmott

Abstract

The passport option is a call option on the balance of a trading account. The option holder retains the gain from trading, while the writer is liable for the loss. We establish pricing equations for various passport options including the multi-asset passport and those with discrete trading constraints. The results are typically known as the Hamilton- Jacobi-Bellman equations and multiple layers of free boundary partial dierential equations for a sequence of optimal stopping times. Also we examine the gain by selling passport options to utility maximising investors and to investors who guess the market from imperfect information.

Suggested Citation

  • H. Ahn & A. Penaud & P. Wilmott, 1999. "Various Passport Options and Their Valuation," OFRC Working Papers Series 1999mf15, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:1999mf15
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/1999mf15.pdf
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    Cited by:

    1. Josef Teichmann & Hanna Wutte, 2023. "Machine Learning-powered Pricing of the Multidimensional Passport Option," Papers 2307.14887, arXiv.org.
    2. G. Dorfleitner & J. Gerer, 2020. "Time consistent pricing of options with embedded decisions," Review of Derivatives Research, Springer, vol. 23(1), pages 85-119, April.
    3. Vicky Henderson & David Hobson, 2001. "Passport options with stochastic volatility," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(2), pages 97-118.
    4. Peter Buchen & Hamish Malloch, 2014. "CLA's, PLA's and a new method for pricing general passport options," Quantitative Finance, Taylor & Francis Journals, vol. 14(7), pages 1201-1209, July.

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