Hi,Does anyone know any good paper(s) with regards to pricing a callable option on equity?The option is European. The callibility feature can be either at certain discrete time point or continuous.Cheers,K

No ideas???

have you tried using Geske's approach for options on options ?

Is the question how to price an option with bermudan feature with underlier being equity type? But then the option is not European...

this is easily doable in a bionomial tree .. either Bermudean or American

The "underlying" is the european call option. The issuer has the right to call this option, either at any time, i.e. american, or at pre-specified dates, i.e. bermudan, paying a penalty fee.Since the option does not pay dividend it should not be optimal to exercise it early. So one should be able to use Geske......I am thinking of using Longstaff-Schwartz to check the above "conclusion". The conditional expectation will then be on european option price instead of the equity price.Any objections?

I am not familiar with Geske's approach, can you state the reference? Since you're trying to value an option on an option I would think you're rather sensitive to the future term structure of vol and should thus be careful with the model you're using.

Geske, Robert, The valuation of compound options, Journal of Financial Economicsgives the price of an european option on a european option in the BS framework.

Thanks, I could not find the original paper but managed to get a simple paper that mentions the underlying idea. I can see how you can do it but I would still have concerns about pricing such an option, with its obvious dependence on future vol, using BS. Stochastic vol might be a better idea in this context.

QuoteOriginally posted by: KhoshtipThe "underlying" is the european call option. The issuer has the right to call this option, either at any time, i.e. american, or at pre-specified dates, i.e. bermudan, paying a penalty fee.Since the option does not pay dividend it should not be optimal to exercise it early. So one should be able to use Geske......I am thinking of using Longstaff-Schwartz to check the above "conclusion". The conditional expectation will then be on european option price instead of the equity price.Any objections?But the "penalty fee" accumulates over time i.e if you call the first period you pay pf*1 for the second pf*2 ..... so the trader might consider exercising the option if the underlying option has a value greater than what he has to pay.

http://ssrn.com/abstract=907407Monte Carlo Bounds for Callable Products with Non-Analytic Break CostsMark S. Joshi