Valuation of installment option by penalty method

Document Type : Research Paper

Authors

Faculty of Mathematical Sciences, University of Tabriz, Tabriz, Iran

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.

Keywords


Volume 3, Issue 4 - Serial Number 4
October 2015
Pages 298-310
  • Receive Date: 28 June 2016
  • Revise Date: 30 August 2016
  • Accept Date: 30 August 2016
  • First Publish Date: 30 August 2016