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The British Option

Le : 20/03/2008 15h30
Par : GORAN PESKIR (University of Manchester, U.K.)
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Résumé : We present a new put/call option where the buyer may exercise at any time prior to maturity whereupon his payoff is the `best prediction' of the European payoff under the hypothesis that the true drift of the stock price equals a contract drift. Inherent in this is the protection feature which is key to the British option. Should the option holder believe the true drift of the stock price to be unfavourable (based upon the observed price movements), he can substitute the true drift with the contract drift and minimise his losses. With the contract drift properly selected the British put option becomes a more `buyer friendly' alternative to the American put: when stock price move- ments are favourable, the buyer may exercise rationally to very comparable gains; when price movements are unfavourable he is a®orded the unique pro- tection described above. Moreover, the British put option is always cheaper than the American put. In the ¯nal part we present a brief review of optimal prediction problems which preceded the development of the British option. This is a joint work with F. Samee (Manchester).