Pricing Israeli options: a pathwise approach

Christoph Kühn · Andreas E. Kyprianou · Kees van Schaik

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Stochastic processes and financial applications Financial Markets and Investment Strategies Probability and Risk Models

Abstract

An Israeli option (also referred to as game option or recall option) generalizes an American option by also allowing the seller to cancel the option prematurely, but at the expense of some penalty. Kifer [Citation15] shows that in the classical Black–Scholes market such contracts have unique no-arbitrage prices. In Kyprianou [Citation20] and Kühn and Kyprianou [Citation19] characterizations were obtained for the price of two classes of Israeli options. For the general case, we give a dual resp. pathwise pricing formula similar to Rogers [Citation23] and investigate this approach numerically.

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References

2003Monte Carlo Methods in Financial Engineering 2003Limit Theorems for Stochastic Processes 2002A Jump-Diffusion Model for Option Pricing 2002Monte Carlo valuation of American options 1977A contingent-claims valuation of convertible securities 1977CONVERTIBLE BONDS: VALUATION AND OPTIMAL STRATEGIES FOR CALL AND CONVERSION 1981Les Aspects Probabilistes Du Controle Stochastique 1998Randomization and the American Put

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2007Hedging with risk for game options in discrete time

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