Super-replication of life-contingent options under the Black-Scholes framework
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
Divisions
MathematicalSciences
Funders
Xi'an Jiaotong-Liverpool University (RDF-23-01-006)
Publication Title
Journal of Applied Probability
Volume
61
Issue
4
Publisher
Cambridge University Press
Publisher Location
EDINBURGH BLDG, SHAFTESBURY RD, CB2 8RU CAMBRIDGE, ENGLAND