American Capped Call Options on Dividend Paying Assets

Posted: 25 Oct 1999

See all articles by Jerome Detemple

Jerome Detemple

Boston University - Department of Finance & Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Mark Broadie

Columbia University - Columbia Business School - Decision Risk and Operations

Abstract

This paper addresses the problem of valuing American call options with caps on dividend paying assets. Since early exercise is allowed, the valuation problem requires the determination of optimal exercise policies. Options with two types of caps are analyzed: constant caps and caps with a constant growth rate. For constant caps the optimal exercise policy is to exercise at the first time at which the underlying asset's price equals or exceeds the minimum of the cap and the optimal exercise boundary for the corresponding uncapped option. For caps that grow at a constant rate the optimal exercise strategy can be specified by three endogenous parameters.

JEL Classification: G12, G13

Suggested Citation

Detemple, Jerome and Broadie, Mark, American Capped Call Options on Dividend Paying Assets. REVIEW OF FINANCIAL STUDIES, Vol 7 No 4, 1994. Available at SSRN: https://ssrn.com/abstract=5397

Jerome Detemple

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 353-4297 (Phone)
(617) 353 6667 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

Mark Broadie (Contact Author)

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States
212-854-4103 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,013
PlumX Metrics