Passport Options: Continuous and Binomial Models

32 Pages Posted: 9 Dec 2010 Last revised: 17 Feb 2011

See all articles by Hamish Malloch

Hamish Malloch

The University of Sydney; Financial Research Network (FIRN)

Peter W. Buchen

The University of Sydney - School of Mathematics and Statistics

Date Written: December 8, 2010

Abstract

In this paper we examine the problem of valuing an exotic derivative known as the passport option. This is a zero strike call on the value of a trading account, the performance of which is governed by the option holder's trading strategy. Whilst this problem has been analysed previously, our contribution proceeds in two directions. We not only provide a continuous time valuation which is constructed differently from the present literature, but also consider the valuation problem assuming the traded asset evolves according to a binomial lattice. Valuation of these contracts under such a framework has not previously appeared in the literature. We show that the optimal trading strategy for the passport option is the same in both the binomial and continuous time models. We also prove convergence of the binomial model to the continuous time case and provide some numerical examples.

Keywords: Passport Options, Binomial Models

JEL Classification: C61

Suggested Citation

Malloch, Hamish and Buchen, Peter W., Passport Options: Continuous and Binomial Models (December 8, 2010). Finance and Corporate Governance Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1722392 or http://dx.doi.org/10.2139/ssrn.1722392

Hamish Malloch (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Peter W. Buchen

The University of Sydney - School of Mathematics and Statistics ( email )

Sydney, New South Wales 2006
Australia
61 2 351 2965 (Phone)
61 2 351 4534 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
172
Abstract Views
893
rank
171,963
PlumX Metrics