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Theory of Probability & Its Applications
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 . This paper proposes a new derivation of the general results . 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 .
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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
Shepp, L. A., & Shiryaev, A. N. (1995). A New Look at Pricing of the "Russian Option". Theory of Probability & Its Applications, 39 (1), 103-119. http://dx.doi.org/10.1137/1139004
Date Posted: 27 November 2017
This document has been peer reviewed.