Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233228 
Year of Publication: 
2006
Series/Report no.: 
Discussion paper No. 12
Publisher: 
Aboa Centre for Economics (ACE), Turku
Abstract: 
We consider the valuation and optimal exercise policy of a δ- penalty minimum guaranteed payment option in the case where the value of the underlying dividend-paying asset follows a linear diffusion. We characterize both the value and optimal exercise policy of the considered game option explicitly and demonstrate that increased volatility increases the value of the option and postpones exercise by expanding the continuation region where exercising is suboptimal. An interesting and natural implication of this finding is that the value of the embedded cancellation rights of the issuer increase as volatility increases.
Subjects: 
minimum guaranteed payment
δ-penalty options
Dynkin games
linear diffusions
JEL: 
G12
C73
C61
Document Type: 
Working Paper

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