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Title: A parabolic variational inequality arising from the valuation of strike reset options
Authors: Yang, Z.
Yi, F.
Dai, M. 
Keywords: American option
Free boundary
Option pricing
Strike reset option
Variational inequality
Issue Date: 15-Nov-2006
Citation: Yang, Z., Yi, F., Dai, M. (2006-11-15). A parabolic variational inequality arising from the valuation of strike reset options. Journal of Differential Equations 230 (2) : 481-501. ScholarBank@NUS Repository.
Abstract: A strike reset option is an option that allows its holder to reset the strike price to the prevailing underlying asset price at a moment chosen by the holder. The pricing model of the option can be formulated as a one-dimensional parabolic variational inequality, or equivalently, a free boundary problem, where the free boundary just corresponds to the optimal reset strategy adopted by the holder of the option. This paper is concerned with the theoretical analysis of the model. The existence and uniqueness of the solution are established. Furthermore, we study properties of the free boundary. The monotonicity and C∞ smoothness of the free boundary are proven in some situations. © 2006 Elsevier Inc. All rights reserved.
Source Title: Journal of Differential Equations
ISSN: 00220396
DOI: 10.1016/j.jde.2006.07.026
Appears in Collections:Staff Publications

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