Two-Point Boundary Problems and Perpetual American Strangles in Jump-Diffusion Models

Abstract

This paper studies pricing of perpetual American strangles under jump-diffusions. Explicit solutions for option values as functions of the exercise boundaries and the exercise boundaries as functions of the ratio between the boundaries are obtained. Calculation of the ratio of the exercise boundaries is reduced to solution of a non-linear equation. The method of the paper can be applied for pricing of double-barrier options. The economic applications include expansion-contraction decisions of an active firm.

Keywords: strangles, barrier options, jump-diffusion processes, two-point boundary problem

JEL Classification: D81, C61, G12