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

24 Pages Posted: 20 Apr 2006

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Date Written: March 2006

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

Suggested Citation

Boyarchenko, Svetlana I., Two-Point Boundary Problems and Perpetual American Strangles in Jump-Diffusion Models (March 2006). Available at SSRN: https://ssrn.com/abstract=896260 or http://dx.doi.org/10.2139/ssrn.896260

Svetlana I. Boyarchenko (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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