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What is this option ???

Suntayodom

Joined
9/29/11
Messages
2
Points
11
Consider a derivative whose payoff depends on two different times T1 and T2, with T2 > T1 > 0 and two numbers K1 > 0 and K2 > 0. The buyer of this derivative has the right to buy 1 share of the stock
at time T1 at price K1. If the price of the stock at time T1 is lower than or equal to K1,
he then has a right to buy the stock at price K2 at time T2. (He does not have the buying
opportunity at time T2 if the price of the stock at time T1 is strictly larger than K1.) Find
a formula for the current price (i.e. at time t = 0) of this derivative.

Is this exotic option have a specific name ?

How to price it ?

Thank You
Vasin
 
It looks similar to Call on Call option but i'm not sure ! Can any one confirm this ?
 
Suntayodom said:
It looks similar to Call on Call option but i'm not sure ! Can any one confirm this ?
Click to expand...

it is not a compound option (i.e. call on call option). that would be the right to buy an option on T1. since your decision is made only on where the stock price is and not where the option price is, this is materially different from a compound option and actually should be easier to price and risk manage
 
It shouldn't be difficult to price with MC or finite differences. I think you could get an analytical formula using the bivariate Normal distribution.
 
Brad Warren said:
It shouldn't be difficult to price with MC or finite differences. I think you could get an analytical formula using the bivariate Normal distribution.
Click to expand...

agreed - best method i think for this is MC using stochastic/local volatility blended process
 
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