The valuation of certain capital investment options and American derivatives can be reduced to the pricing of American options with an endogenous "interest rate" that can assume negative values. We formally show that, in the presence of a negative "interest rate" with either finite or infinite maturity, a double continuation region can emerge: option exercise is optimally postponed not only when the option is insufficiently in the money but also when the option is excessively in the money. We substantiate our formal findings by providing closed-form xamples with infinite maturity and by obtaining numerical results in the finite maturtity case.

Real Options and American Derivatives: The Double Continuation Region

BATTAUZ, ANNA;DE DONNO, MARZIA;SBUELZ, ALESSANDRO
2009

Abstract

The valuation of certain capital investment options and American derivatives can be reduced to the pricing of American options with an endogenous "interest rate" that can assume negative values. We formally show that, in the presence of a negative "interest rate" with either finite or infinite maturity, a double continuation region can emerge: option exercise is optimally postponed not only when the option is insufficiently in the money but also when the option is excessively in the money. We substantiate our formal findings by providing closed-form xamples with infinite maturity and by obtaining numerical results in the finite maturtity case.
Battauz, Anna; DE DONNO, Marzia; Sbuelz, Alessandro
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11565/3714196
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