A New Look at Pricing of the "Russian Option"

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Statistics Papers
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diffusion model of the (B
S)-market
bank account
rational option price
rational expiration time
optimal stopping rules
smooth sewing condition
the Stephan problem
diffusion with reflection
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Statistics and Probability
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Shepp, Larry A
Shiryaev, A. N
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The “Russian option” was introduced and calculated with the help of the solution of the optimal stopping problem for a two-dimensional Markov process in [10]. This paper proposes a new derivation of the general results [10]. The key idea is to introduce the dual martingale measure which permits one to reduce the “two-dimensional” optimal stopping problem to a “one-dimensional” one. This approach simplifies the discussion and explain the simplicity of the answer found in [10].

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1995
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Theory of Probability & Its Applications
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