In this paper we provide a guided tour through the valuation of passport options. The holder of the passport option has the right to choose a trading strategy on the underlying financial asset. At maturity the holder receives the profits of such strategy if positive. In case of a negative payout of the strategy, the position is closed without any obligation for the holder. Hence, a passport option is a call on the profits of a trading account. The pricing of this derivative is reduced to a stochastic control problem. Since the involved functions lack the usually required regularity conditions, viscosity solutions are employed to solve the pricing problem.

A note on passport options

BATTAUZ, ANNA;DE DONNO, MARZIA
2009

Abstract

In this paper we provide a guided tour through the valuation of passport options. The holder of the passport option has the right to choose a trading strategy on the underlying financial asset. At maturity the holder receives the profits of such strategy if positive. In case of a negative payout of the strategy, the position is closed without any obligation for the holder. Hence, a passport option is a call on the profits of a trading account. The pricing of this derivative is reduced to a stochastic control problem. Since the involved functions lack the usually required regularity conditions, viscosity solutions are employed to solve the pricing problem.
Battauz, Anna; DE DONNO, Marzia
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11565/3715053
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