American option pricing is an important and engaging area of financial economics, particularly so in the presence of negative interest rates. Quanto options offer major international hedg-ing/investment opportunities. We provide a comprehensive description of the optimal exercise policies associated with American quanto options. We show that a non-standard exercise policy characterized by a double continuation region may be optimal in the presence of non-positive domestic interest rates. We study empirical examples of finite-maturity American quanto options for which a double continuation region surrounding a non-empty early exercise region exists even if the infinite-maturity early exercise region is empty and the value of the infinite -maturity option is unbounded. Under the assumptions underpinning such empirical examples, we carefully characterize the existence, the monotonicity properties and the close-to-maturity behaviour of the upper and lower critical prices.

On the exercise of American quanto options

Battauz, Anna;De Donno, Marzia;Sbuelz, Alessandro
2022-01-01

Abstract

American option pricing is an important and engaging area of financial economics, particularly so in the presence of negative interest rates. Quanto options offer major international hedg-ing/investment opportunities. We provide a comprehensive description of the optimal exercise policies associated with American quanto options. We show that a non-standard exercise policy characterized by a double continuation region may be optimal in the presence of non-positive domestic interest rates. We study empirical examples of finite-maturity American quanto options for which a double continuation region surrounding a non-empty early exercise region exists even if the infinite-maturity early exercise region is empty and the value of the infinite -maturity option is unbounded. Under the assumptions underpinning such empirical examples, we carefully characterize the existence, the monotonicity properties and the close-to-maturity behaviour of the upper and lower critical prices.
2022
Battauz, Anna; De Donno, Marzia; Sbuelz, Alessandro
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/4051829
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