Pricing, No-Arbitrage Bounds and Robust Hedging of Installment Options

41 Pages Posted: 9 Mar 2001

See all articles by Mark Davis

Mark Davis

Vienna University of Technology - Financial and Actuarial Mathematics Research Group

Walter Schachermayer

Universität Wien, Fakultät für Mathematik

Robert Tompkins

Business School of Finance & Management (HfB) - Bankakademie Group

Date Written: September 11, 2000

Abstract

An installment option is a European option in which the premium, instead of being paid up-front, is paid in a series of installments. If all installments are paid the holder receives the exercise value, but the holder has the right to terminate payments on any payment date, in which case the option lapses with no further payments on either side. We discuss pricing and risk management for these options, in particular the use of static hedges, and also study a continuous-time limit in which premium is paid at a certain rate per unit time.

Key words: Option Pricing, Exotic Options, Stable Hedging, Replicating, Portfolios, No-arbitrage bounds

JEL Classification: C15, G13

Suggested Citation

Davis, Mark and Schachermayer, Walter and Tompkins, Robert George, Pricing, No-Arbitrage Bounds and Robust Hedging of Installment Options (September 11, 2000). Available at SSRN: https://ssrn.com/abstract=262854 or http://dx.doi.org/10.2139/ssrn.262854

Mark Davis

Vienna University of Technology - Financial and Actuarial Mathematics Research Group

Karlsplatz 13
A-1040 Vienna
Austria
+43 01 58801 0 (Phone)
+43 01 58801 40199 (Fax)

Walter Schachermayer

Universität Wien, Fakultät für Mathematik ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria
(+43-1) 4277-50723 (Phone)
(+43-1) 4277-850723 (Fax)

Robert George Tompkins (Contact Author)

Business School of Finance & Management (HfB) - Bankakademie Group ( email )

Frankfurt
Germany
(069) 154008-718 (Phone)

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