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2010•International Journal of Theoretical and Applied FinanceRequires access

IT'S YOUR CHOICE: A UNIFIED APPROACH TO CHOOSER OPTIONS

Klaus Sandmann, Manuel Wittke

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Abstract

We propose a unified framework for the pricing and hedging of chooser options on lognormal assets. This includes e.g. exchange or inflation rates under stochastic interest rates or equities under stochastic interest rates and dividend yields. This extends and includes chooser options under deterministic interest rates by a multidimensional model of an international economy with correlated stochastic processes. In this framework we derive closed form solutions of the arbitrage price for different specifications of chooser options. Also different hedge strategies are derived and their properties compared.

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What this paper is about

We propose a unified framework for the pricing and hedging of chooser options on lognormal assets. This includes e.g. exchange or inflation rates under stochastic interest rates or equities under stochastic interest rates and dividend yields. This extends and includes chooser options under deterministic interest rates by a multidimensional model of an international economy with correlated stochastic processes. In this framework we derive closed form solutions of the arbitrage price for different specifications of chooser options. Also different hedge strategies are derived and their properties compared.

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Available abstract

We propose a unified framework for the pricing and hedging of chooser options on lognormal assets. This includes e.g. exchange or inflation rates under stochastic interest rates or equities under stochastic interest rates and dividend yields. This extends and includes chooser options under deterministic interest rates by a multidimensional model of an international economy with correlated stochastic processes. In this framework we derive closed form solutions of the arbitrage price for different specifications of chooser options. Also different hedge strategies are derived and their properties compared.

Key concepts: Hedge, Arbitrage, Interest rate, Econometrics, Economics, Dividend, Financial economics, Actuarial science

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