The pricing formula for cancellable European options

TL;DR

This paper derives an explicit valuation formula for cancellable European options, where the seller can cancel the contract anytime for a penalty, extending traditional European option pricing models.

Contribution

It introduces a novel explicit valuation formula for cancellable European options with a flexible cancellation feature.

Findings

Provides an iterative method for early cancellation valuation

Derives an explicit formula for the cancellable European call option

Enhances understanding of flexible option termination features

Abstract

This paper examines the value of a cancellable European option in a finite time horizon setting. The specifications of this generalized European option allow the seller to cancel the option at any point in time for a fixed penalty paid directly to the holder. Here, we provide an explicit valuation formula for the European game call where the early cancellation time is obtained iteratively.