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arXiv · 1801.00266

Double continuation regions for American and Swing options with negative discount rate in L\'evy models

Marzia De Donno·Zbigniew Palmowski·Joanna Tumilewicz
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Abstract

In this paper we study perpetual American call and put options in an exponential L\'evy model. We consider a negative effective discount rate which arises in a number of financial applications including stock loans and real options, where the strike price can potentially grow at a higher rate than the original discount factor. We show that in this case a double continuation region arises and we identify the two critical prices. We also generalize this result to multiple stopping problems of Swing type, that is, when successive exercise opportunities are separated by i.i.d. random refraction times. We conduct an extensive numerical analysis for the Black-Scholes model and the jump-diffusion model with exponentially distributed jumps.

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Marzia De Donno, Zbigniew Palmowski, Joanna Tumilewicz. 2017-12-31. Double continuation regions for American and Swing options with negative discount rate in L\'evy models. https://arxiv.org/abs/1801.00266

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