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Pricing perpetual options for jump processes. With discussion by X. Sheldon Lin and Xiaolan Zhang and a reply by the authors. (English) Zbl 1081.91528

Summary: We consider two models in which the logarithm of the price of an asset is a shifted compound Poisson process. Explicit results are obtained for prices and optimal exercise strategies of certain perpetual American options on the asset, in particular for the perpetual put option. In the first model in which the jumps of the asset price are upwards, the results are obtained by the martingale approach and the smooth junction condition. In the second model in which the jumps are downwards, we show that the value of the strategy corresponding to a constant option-exercise boundary satisfies a certain renewal equation. Then the optimal exercise strategy is obtained from the continuous junction condition. Furthermore, the same model can be used to price certain reset options. Finally, we show how the classical model of geometric Brownian motion can be obtained as a limit and also how it can be integrated in the two models.

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
60G35 Signal detection and filtering (aspects of stochastic processes)
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