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The Danish National Research Foundation:
Network in Mathematical Physics and Stochastics



Funded by The Danish National Research Foundation

MPS-RR 2003-11
May 2003




The Russian Option: Finite Horizon

by: Goran Peskir

Abstract

We show that the optimal stopping boundary for the Russian option with finite horizon can be characterized as a unique solution of the nonlinear integral equation arising from the early exercise premium representation (an explicit formula for the arbitrage-free price in terms of the optimal stopping boundary having a clear economic interpretation). The results obtained stand in a complete parallel with the best known results on the American put option with finite horizon. The key argument in the proof relies upon a local time-space formula.

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This paper has now been published in Finance Stoch. (to appear)