On the Optimal Exercise Boundary for an American Put Option
نویسندگان
چکیده
An American put option is a derivative financial instrument that gives its holder the right but not the obligation to sell an underlying security at a pre-determined price. American options may be exercised at any time prior to expiry at the discretion of the holder, and the decision as to whether or not to exercise leads to a free boundary problem. In this paper, we examine the behavior of the free boundary close to expiry. Working directly with the underlying PDE, by using asymptotic expansions, we are able to deduce this behavior of the boundary in this limit.
منابع مشابه
American Option Pricing of Future Contracts in an Effort to Investigate Trading Strategies; Evidence from North Sea Oil Exchange
In this paper, Black Scholes’s pricing model was developed to study American option on future contracts of Brent oil. The practical tests of the model show that market priced option contracts as future contracts less than what model did, which mostly represent option contracts with price rather than without price. Moreover, it suggests call option rather than put option. Using t hypothesis test...
متن کاملNumerical Solution of Integral Equation for the Early Exercise Boundary of American Put Option
The paper is focused on numerical approximation of early exercise boundary within American put option pricing problem. Assuming non-dividend paying, American put option leads to two disjunctive regions, a continuation one and a stopping one, which are separated by an early exercise boundary. We present variational formulation of American option problem with special attention to early exercise a...
متن کاملA Simple Numerical Method for Pricing an American Put Option
We present a simple numerical method to find the optimal exercise boundary in an American put option. We formulate an intermediate function with the fixed free boundary that has Lipschitz character near optimal exercise boundary. Employing it, we can easily determine the optimal exercise boundary by solving a quadratic equation in time-recursive way. We also present several numerical results wh...
متن کاملOptimal exercise boundary for an American put option
The optimal exercise boundary near the expiration time is determined for an American put option. It is obtained by using Green's theorem to convert the boundary value problem for the price of the option into an integral equation for the optimal exercise boundary. This integral equation is solved asymptotically for small values of the time to expiration. The leading term in the asymptotic soluti...
متن کاملApproximate ordinary differential equations for the optimal exercise boundaries of American put and call options
We revisit the American put and call option valuation problems. We derive analytical formulas for the option prices and approximate ordinary differential equations for the optimal exercise boundaries. Numerical simulations yield accurate option prices and comparable computational speeds when benchmarked against the binomial method for calculating option prices. Our approach is based on the Mell...
متن کاملOptimal Stopping, Free Boundary, and American Option in a Jump-Diffusion Model
This paper considers the American put option valuation in a jumpdiffusion model and relates this optimal-stopping problem to a parabolic integrodifferential free-boundary problem, with special attention to the behavior of the optimal-stopping boundary. We study the regularity of the American option value and obtain in particular a decomposition of the American put option price as the sum of its...
متن کاملذخیره در منابع من
با ذخیره ی این منبع در منابع من، دسترسی به آن را برای استفاده های بعدی آسان تر کنید
عنوان ژورنال:
دوره شماره
صفحات -
تاریخ انتشار 2001