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On Perpetual American Strangles

Franck Moraux
The Journal of Derivatives Summer 2009, 16 (4) 82-97; DOI: https://doi.org/10.3905/JOD.2009.16.4.082
Franck Moraux
is professeur des universités at the Université de Rennes 1 and Directeur Adjoint of the Centre de Recherche en Economie et Management in Rennes, France.
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  • For correspondence: franck.moraux@univ-rennes1.fr
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Abstract

This article analyzes perpetual American strangles with no recourse to advanced numerical techniques. Our analytical approach rests on an analogy with asymmetric rebates of double knock-out barrier options. The optimal exercise policy is modeled by a couple of boundaries that simultaneously solve a system of two nonlinear equations. Numerical investigations then highlight salient features of American strangles and compare them with portfolios of options that may be used as proxies. Overall, results show that these latter are significantly upward biased in terms of prices and that, more dramatically, they lead the holder to exercise inappropriately.

TOPICS: Options, statistical methods

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The Journal of Derivatives
Vol. 16, Issue 4
Summer 2009
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On Perpetual American Strangles
Franck Moraux
The Journal of Derivatives May 2009, 16 (4) 82-97; DOI: 10.3905/JOD.2009.16.4.082

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On Perpetual American Strangles
Franck Moraux
The Journal of Derivatives May 2009, 16 (4) 82-97; DOI: 10.3905/JOD.2009.16.4.082
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  • Article
    • Abstract
    • THE FRAMEWORK AND MOTIVATION
    • PRICING AND HEDGING PERPETUAL AMERICAN STRANGLES
    • ANALYZING PERPETUAL AMERICAN STRANGLES
    • COMPARISON TO PORTFOLIOS OF AMERICAN INDIVIDUALS
    • APPLICATIONS TO PERPETUAL AMERICAN STRADDLES
    • CONCLUSION
    • APPENDIX A
    • ENDNOTES
    • REFERENCES
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