Journal of Computational Finance

The passport option

Leif Andersen, Jesper Andreasen, and Rupert Brotherton-Ratcliffe


A passport option grants its holder the right to engage ina short/long trading strategy of his own choice, while obligating the option writer to cover any net losses on the strategy. Using appropriate shifts of numeraire, it is shown that the passport option price is the solution to a Markov control problem. The authors identify the optimal trading strategy and derive a nonlinear PDE satisfied by the asset-deflated option price. A closed-form pricing formula is derived in a special case. For the general case, the paper illustrates how a Crank-Nicholson finite-difference scheme can be used to price the option. The numerical scheme is shown to be applicable to a number of variations on the basic option contract, including American exercise and time-discrete trading strategies.


Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here