Guanyu LiAndreas Yacob Pricing Chooser Options Using the Finite Differences Approach

What is a Chooser Option Can choose at a later time before maturity whether it is a call or a put Usually have same exercise price regardless of whether the decision is a call or a put Hedges against large movements both up and down on the underlying asset Very useful on underlying assets where emotions from a future event will largely affect the price, i.e. a company in a court battle, a biotech company seeking approval on a wonder drug Simple vs. Complex

Implementation

Results (Euler’s method)

V vs. Time and Space

Analytical formula (M. Rubinstein) t1 = time at which choosing is exercised T2 = time to maturity

Choosing at time t < T Choosing at 3 months on a 6 month maturity option (analytical)

Computing Δ

Conclusion Chooser options not issued often, but very useful to hold Value is high when stock price goes either very high or very low