Abstract
The purpose of this paper is to examine a special kind of game option, whose main feature is the presence of an early exercise right for the seller as well as for the buyer. The seller has to pay some amount above the usual option payment for this right. Usually, this penalty payment is presented by a constant amount during the option life. Alternatively, in this paper we present the cancellation payment as the usual option payment multiplied by a constant. We introduce also a discount factor which gives a benefit for early exercising. It is closely related to the existence of a continuous dividend payment. In that way we can describe a dividend model in our framework.The approach we use is based on finding the seller’s and buyer’s exercise regions. We do this maximizing their expected future financial results. After that we use the first exit properties to calculate the fair option price.
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