A New Look at Pricing of the ”Russian Option“ | Zendy

L. A. Shepp | Zendy; Albert N. Shiryaev | Zendy

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A New Look at Pricing of the ”Russian Option“

Author(s) -

L. A. Shepp,

Albert N. Shiryaev

Publication year - 1995

Publication title -

theory of probability and its applications

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.458

H-Index - 32

eISSN - 1095-7219

pISSN - 0040-585X

DOI - 10.1137/1139004

Subject(s) - martingale (probability theory) , optimal stopping , simplicity , optional stopping theorem , mathematics , dual (grammatical number) , key (lock) , stopping time , mathematical optimization , markov process , mathematical economics , measure (data warehouse) , computer science , statistics , art , philosophy , literature , computer security , epistemology , database

The “Russian option” was introduced and calculated with the help of the solution of the optimal stopping problem for a two-dimensional Markov process in [10]. This paper proposes a new derivation of the general results [10]. The key idea is to introduce the dual martingale measure which permits one to reduce the “two-dimensional” optimal stopping problem to a “one-dimensional” one. This approach simplifies the discussion and explain the simplicity of the answer found in [10].

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