Perpetual Options on Multiple Underlyings |
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Authors: | Peter W Duck Geoffrey W Evatt Paul V Johnson |
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Institution: | 1. School of Mathematics, The University of Manchester, Manchester, UKPeter.Duck@manchester.ac.uk;3. School of Mathematics, The University of Manchester, Manchester, UK |
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Abstract: | AbstractWe study three classes of perpetual option with multiple uncertainties and American-style exercise boundaries, using a partial differential equation-based approach. A combination of accurate numerical techniques and asymptotic analyses is implemented, with each approach informing and confirming the other. The first two examples we study are a put basket option and a call basket option, both involving two stochastic underlying assets, whilst the third is a (novel) class of real option linked to stochastic demand and costs (the details of the modelling for this are described in the paper). The Appendix addresses the issue of pricing American-style perpetual options involving (just) one stochastic underlying, but in which the volatility is also modelled stochastically, using the Heston (1993) framework. |
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Keywords: | Option pricing perpetual options american options rainbow options heston volatility model stochastic volatility |
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