= Chooser with positive exercise cost
{title2=$\max(p-K,c-K,0)$}
At its choice time this claim permits purchase of either of two later-expiring <European options> for an exercise cost $K$, or abandonment. Its payoff is $\max(p-K,c-K,0)$. For common strike $K_3$ and remaining time $\tau$, <put-call parity> places the branch crossing at $D=K_3e^{-r\tau}$. In the <Black-Scholes model>, both branch values there equal $D[2\Phi(\sigma\sqrt\tau/2)-1]$. An exercise cost above this minimum creates a central interval in which neither choice is worth exercising.
Back to article page
