Super-replication of life-contingent options under the Black-Scholes framework

Authors

• Ze-An Ng
• You-Beng KohFollow
• Tee-How LooFollow
• Hailiang Yang

Document Type

Article

Publication Date

12-1-2024

Abstract

We consider the super-replication problem for a class of exotic options known as life-contingent options within the framework of the Black-Scholes market model. The option is allowed to be exercised if the death of the option holder occurs before the expiry date, otherwise there is a compensation payoff at the expiry date. We show that there exists a minimal super-replication portfolio and determine the associated initial investment. We then give a characterisation of when replication of the option is possible. Finally, we give an example of an explicit super-replicating hedge for a simple life-contingent option.

Keywords

Exotic options, option pricing, option hedging, stochastic analysis

Publication Title

Journal of Applied Probability

Recommended Citation

Ng, Ze-An; Koh, You-Beng; Loo, Tee-How; and Yang, Hailiang, "Super-replication of life-contingent options under the Black-Scholes framework" (2024). Research Publications (2021 to 2025). 6143.
https://knova.um.edu.my/research_publications_2021_2025/6143

Divisions

MathematicalSciences

Funders

Xi'an Jiaotong-Liverpool University (RDF-23-01-006)

Volume

61

Issue

4

Publisher

Cambridge University Press

Publisher Location

EDINBURGH BLDG, SHAFTESBURY RD, CB2 8RU CAMBRIDGE, ENGLAND