Valuation of installment option by penalty method
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Abstract:
In this paper, installment options on the underlying asset which evolves according to Black-Scholes model and pays constant dividend to its owner will be considered. Applying arbitrage pricing theory, the non-homogeneous parabolic partial differential equation governing the value of installment option is derived. Then, penalty method is used to value the European continuous installment call option.
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valuation of installment option by penalty method
in this paper, installment options on the underlying assetwhich evolves according to black-scholes model and pays constant dividendto its owner will be considered. applying arbitrage pricing theory,the non-homogeneous parabolic partial differential equation governingthe value of installment option is derived. then, penalty method is usedto value the european continuous installment call option.
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Journal title
volume 3 issue 4
pages 298- 310
publication date 2015-10-01
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