Integral of a Gaussian function: Difference between revisions

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In [[finance]], a '''chooser option''' is a special type of [[option contract]]. It gives the purchaser a fixed period of time to decide whether the [[derivative]] will be a [[Europe]]an [[call option|call]] or [[put option]].
 
In more detail, a chooser option has a specified decision time <math> t_1 </math>, where the [[buyer]] has to make the decision described above. Finally, at the [[expiration (options)|expiration time]] <math> t_2 </math> the option expires. If the buyer has chosen that it should be a [[call option]], the payout is <math> max(S-K,0) </math>. For the choice of a [[put option]], the payout is <math> max(K-S,0) </math>. Here <math> K </math> is the [[strike price]] of the option and <math> S </math> is the [[stock price]] at expiry.
 
== Replication ==
For [[stocks]] without [[dividend]], the chooser option can be replicated using one [[call option]] with [[strike price]] <math> K </math> and expiration time <math> t_2 </math>, and one [[put option]] with [[strike price]] <math> K e^{-r(t_2-t_1)} </math> and expiration time <math> t_1 </math>;.<ref>Yue-Kuen Kwok, Compound options</ref>
 
== References ==
<references/>
 
== Bibliography ==
* Yue-Kuen Kwok, [[Compound option]]s (from Derivatives Week and Encyclopedia of Financial Engineering and Risk Management) [http://www.math.ust.hk/~maykwok/piblications/Articles/comp%20option.pdf]
 
{{DEFAULTSORT:Chooser Option}}
[[Category:Options (finance)]]

Latest revision as of 15:00, 25 April 2013

In finance, a chooser option is a special type of option contract. It gives the purchaser a fixed period of time to decide whether the derivative will be a European call or put option.

In more detail, a chooser option has a specified decision time t1, where the buyer has to make the decision described above. Finally, at the expiration time t2 the option expires. If the buyer has chosen that it should be a call option, the payout is max(SK,0). For the choice of a put option, the payout is max(KS,0). Here K is the strike price of the option and S is the stock price at expiry.

Replication

For stocks without dividend, the chooser option can be replicated using one call option with strike price K and expiration time t2, and one put option with strike price Ker(t2t1) and expiration time t1;.[1]

References

  1. Yue-Kuen Kwok, Compound options

Bibliography

  • Yue-Kuen Kwok, Compound options (from Derivatives Week and Encyclopedia of Financial Engineering and Risk Management) [1]