Minimum return guarantees with funds switching rights --- An optimal stopping problem

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  • Recently, there is a growing trend to offer guarantee products where the investor is allowed to shift her account/investment value between multiple funds. The switching right is granted a finite number per year, i.e. it is American style with multiple exercise possibilities. In consequence, the pricing and the risk management is based on the switching strategy which maximizes the value of the guarantee put option. We analyze the optimal stopping problem in the case of one switching right within different model classes and compare the exact price with the lower price bound implied by the optimal deterministic switching time. We show that, within the class of log-price processes with independent increments, the stopping problem is solved by a deterministic stopping time if (and only if) the price process is in addition continuous. Thus, in a sense, the Black & Scholes model is the only (meaningful) pricing model where the lower price bound gives the exact price. It turns out that even moderate deviations from the Black & Scholes model assumptions give a lower price bound which is really below the exact price. This is illustrated by means of a stylized stochastic volatility model setup.

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Metadaten
Verfasserangaben:Antje Mahayni, John Schoenmakers
URN:urn:nbn:de:0296-matheon-7130
Gutachter*in:Peter Imkeller
Dokumentart:Preprint, Forschungszentrum Matheon
Sprache:Englisch
Datum der Erstveröffentlichung:28.09.2010
Datum der Freischaltung:22.09.2010
Institut:Weierstraß-Institut für Angewandte Analysis und Stochastik (WIAS)
Preprint-Nummer:726
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