American Option: Exercice-Payout different from Payout at Maturity

[Kunz Dr. Andreas - Munich-MR]

Dear all,

 

I am new to QuantLib.

I would like to value the early exercise option in the case of (time dependent) surrender penalties, which is typical for insurance products.

Is there a generic way in QuantLib (or even in QuantLibXL) to deal with the early exercise option if the intrinsic value (i.e. payout at early exercise time) differs from the payout profile in case of continuation?

As far as I understood, the American exercise condition QuantLib::AmericanCondition assumes that the payout at maturity and at the early exercise time coincides.

 

Thanks in advance for your feedback.

 

Andreas

 

 

Münchener Rückversicherungs-Gesellschaft
Aktiengesellschaft in München
Königinstraße 107, 80802 München
Sitz der Gesellschaft: München
Amtsgericht München, HRB 42039

Vorsitzender des Aufsichtsrats: Dr. Hans-Jürgen Schinzler
Vorstand: Dr. Nikolaus von Bomhard, Vorsitzender;
Dr. Ludger Arnoldussen, Dr. Thomas Blunck,
Georg Daschner, Dr. Torsten Jeworrek, Dr. Peter Röder,
Dr. Jörg Schneider, Dr. Wolfgang Strassl, Dr. Joachim Wenning

------------------------------------------------------------------------------
Nokia and AT&T present the 2010 Calling All Innovators-North America contest
Create new apps & games for the Nokia N8 for consumers in  U.S. and Canada
$10 million total in prizes - $4M cash, 500 devices, nearly $6M in marketing
Develop with Nokia Qt SDK, Web Runtime, or Java and Publish to Ovi Store
http://p.sf.net/sfu/nokia-dev2dev
_______________________________________________
QuantLib-users mailing list
[hidden email]
https://lists.sourceforge.net/lists/listinfo/quantlib-users

[Luigi Ballabio]

On Fri, 2010-09-24 at 10:09 +0200, Kunz Dr. Andreas - Munich-MR wrote:
> Is there a generic way in QuantLib (or even in QuantLibXL) to deal
> with the early exercise option if the intrinsic value (i.e. payout at
> early exercise time) differs from the payout profile in case of
> continuation?
>
> As far as I understood, the American exercise
> conditionQuantLib::AmericanConditionassumes that the payout at
> maturity and at the early exercise time coincides.

It will take a bit of work.  First, you'll have to write your own
condition by inheriting from StepCondition.  Something like:

class SurrenderCondition : public StepCondition<Array> {
  public:
    SurrenderCondition(/* whatever argument you need */);
    void applyTo(Array& a, Time t) const {
        if (t == maturity_) {
            // apply payout at maturity
        } else {
            // apply time-dependent payout
        }
    }
  private:
    // the data you'll need
};

Then, you'll have to make sure that the needed arguments percolate from
the option and the engine down to the point where the condition above is
instantiated.  You might want to copy an existing engine (such as
FdAmericanEngine) and modify it so that it takes the needed arguments
and instantiates a SurrenderCondition with them.  You might also want to
inherit from Payoff in order to implement your payout formula.

I understand it's quite a bit to chew on, so post again on the list if
you get stuck...

Luigi


--

Though this be madness, yet there is method in't.
-- Hamlet, Act II, scene II



------------------------------------------------------------------------------
Start uncovering the many advantages of virtual appliances
and start using them to simplify application deployment and
accelerate your shift to cloud computing.
http://p.sf.net/sfu/novell-sfdev2dev
_______________________________________________
QuantLib-users mailing list
[hidden email]
https://lists.sourceforge.net/lists/listinfo/quantlib-users