AMERICAN CAPPED CALL OPTIONS ON DIVIDEND-PAYING ASSETS

This article addresses the problem of valuing American call options wi th caps on dividend-paying assets. Since early exercise is allowed, th e valuation problem requires the determination of optimal exercise pol icies. Options with two types of caps are analyzed: constant caps and caps with a constant growth rate. For constant caps, it is optimal to exercise at the first time at which the underlying asset's price equal s or exceeds the minimum of the cap and the optimal exercise boundary for the corresponding uncapped option. For caps that grow at a constan t rate, the optimal exercise strategy can be specified by three endoge nous parameters.