Perpetual cancellable American options with convertible features
Volume 10, Issue 4 (2023), pp. 367–395
Pub. online: 4 August 2023
Type: Research Article
Open Access
Open Access
Received
24 December 2022
24 December 2022
Revised
5 July 2023
5 July 2023
Accepted
20 July 2023
20 July 2023
Published
4 August 2023
4 August 2023
Abstract
The major characteristic of the cancellable American options is the existing writer’s right to cancel the contract prematurely paying some penalty amount. The main purpose of this paper is to introduce and examine a new subclass of such options for which the penalty which the writer owes for this right consists of three parts – a fixed amount, shares of the underlying asset, and a proportion of the usual option payment. We examine the asymptotic case in which the maturity is set to be infinity. We determine the optimal exercise regions for the option’s holder and writer and derive the fair option price.
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