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Super-replication of life-contingent options under the Black–Scholes framework
Published online by Cambridge University Press: 05 April 2024
Abstract
We consider the super-replication problem for a class of exotic options known as life-contingent options within the framework of the Black–Scholes market model. The option is allowed to be exercised if the death of the option holder occurs before the expiry date, otherwise there is a compensation payoff at the expiry date. We show that there exists a minimal super-replication portfolio and determine the associated initial investment. We then give a characterisation of when replication of the option is possible. Finally, we give an example of an explicit super-replicating hedge for a simple life-contingent option.
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- © The Author(s), 2024. Published by Cambridge University Press on behalf of Applied Probability Trust