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A Simple Numerical Method for Pricing an American Put Option

20 citations0/0 files storedJournal of Applied Mathematics

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Stochastic processes and financial applications Financial Markets and Investment Strategies Adaptive Dynamic Programming Control

Abstract

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 which illustrate a comparison to other methods.

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References

1973The Pricing of Options and Corporate Liabilities 1973Theory of Rational Option Pricing 2005Theory of rational option pricing 1979Option pricing: A simplified approach 2001Valuing American Options by Simulation: A Simple Least-Squares Approach 1987Efficient Analytic Approximation of American Option Values 1984The American Put Option Valued Analytically 1990The Analytic Valuation of American Options

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