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1 results

  • Super-replication of life-contingent options under the Black–Scholes framework

  • Part of
  • Ze-An Ng, You-Beng Koh, Tee-How Loo, Hailiang Yang
  • Journal:
    Journal of Applied Probability / Volume 61 / Issue 4 / December 2024
    Published online by Cambridge University Press:
    05 April 2024, pp. 1263-1277
    Print publication:
    December 2024
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  • 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.