In this paper we provide a guided tour through the valuation of passport opions, presented in the seminal paper of Anderset et al. The holder of the passport option has the right to choose a trading strategy on the underlinying financial asset. At maturity the holder receives the profits of such strategy, if positive. In case of a negative payout of the strategy, the position is closed withouth any obligation for the holder. Hence, a passport option is a call on the profits of a trading account. The pricing of this options is reduced to a stochastic control problem. Since the involved functions lack the usually regularity conditions, viscosity solutions are employed to solve the pricing problem.
Battauz, A., De Donno, M., A note on passport options, <<PRAVARTAK>>, 2009; IV (10): 18-25 [http://hdl.handle.net/10807/168916]
A note on passport options
De Donno, Marzia
2009
Abstract
In this paper we provide a guided tour through the valuation of passport opions, presented in the seminal paper of Anderset et al. The holder of the passport option has the right to choose a trading strategy on the underlinying financial asset. At maturity the holder receives the profits of such strategy, if positive. In case of a negative payout of the strategy, the position is closed withouth any obligation for the holder. Hence, a passport option is a call on the profits of a trading account. The pricing of this options is reduced to a stochastic control problem. Since the involved functions lack the usually regularity conditions, viscosity solutions are employed to solve the pricing problem.
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