Free Boundary Problems and Perpetual American Strangles
نویسندگان
چکیده
We consider the perpetual American strangles in the geometric jump-diffusion models. We assume further that the jump distribution is a mixture of exponential distributions. To solve the corresponding optimal stopping problem for this option, by using the approach in [5], we derive a system of equations that is equivalent to the associated free boundary problem with smooth pasting condition. We verify the existence of the solutions to these equations. Then, in terms of the solutions together with a verification theorem, we solve the optimal stopping problem and hence find the optimal exercise boundaries and the rational price for the perpetual American strangle. In addition we work out an algorithm for computing the optimal exercise boundaries and the rational price of this option.
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