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Optimal liquidation of a call spread

Part of: Stochastic processes

Published online by Cambridge University Press:  14 July 2016

Erik Ekström ,
Carl Lindberg ,
Johan Tysk  and
Henrik Wanntorp
Erik Ekström*
Affiliation:
Uppsala University
Carl Lindberg*
Affiliation:
Chalmers University of Technology
Johan Tysk*
Affiliation:
Uppsala University
Henrik Wanntorp*
Affiliation:
Swedbank Markets
*
∗Postal address: Department of Mathematics, Uppsala University, Box 480, SE-751 06 Uppsala, Sweden.
∗∗∗Postal address: Chalmers University of Technology, SE-412 96 Göteborg, Sweden.
∗Postal address: Department of Mathematics, Uppsala University, Box 480, SE-751 06 Uppsala, Sweden.
∗∗∗∗Postal address: Quantitative Research, Swedbank Markets, SE-105 34 Stockholm, Sweden.
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Abstract

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We study the optimal liquidation strategy for a call spread in the case when an investor, who does not hedge, believes in a volatility that differs from the implied volatility. The liquidation problem is formulated as an optimal stopping problem, which we solve explicitly. We also provide a sensitivity analysis with respect to the model parameters.

Keywords

Optimal stoppingcall spreadBachelier model

MSC classification

Secondary: 60G40: Stopping times; optimal stopping problems; gambling theory
Type
Research Article
Information
Journal of Applied Probability , Volume 47 , Issue 2 , June 2010 , pp. 586 - 593
Copyright
Copyright © Applied Probability Trust 2010 

Footnotes

Support from the Swedish Research Council (VR) is gratefully acknowledged.

References

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