Early Exercise Premium and Boundary in American Option Pricing Problem

Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F49777513%3A23510%2F17%3A43932606" target="_blank" >RIV/49777513:23510/17:43932606 - isvavai.cz</a>
Result on the web
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DOI - Digital Object Identifier
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Result language
angličtina
Original language name
Early Exercise Premium and Boundary in American Option Pricing Problem
Original language description
The paper is focused on American 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 action effect. Next, we discuss financially motivated additive decomposition of American option price into a European option price and another part due to the extra premium required by early exercising the option contract. As the optimal exercise boundary is a free boundary, its determination is coupled with the determination of the option price. Therefore, a closed-form expression of the free boundary is not attainable in general. We discuss in detail a derivation of an asymptotic expression of the early exercise boundary. Finally, we present some numerical results of determination of free boundary based upon this approach. All computations are performed by sw Mathematica, and suitable numerical procedure is discussed in detail, as well.
Czech name
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Czech description
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Publication year
2017
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Article name in the collection
35th International Conference Mathematical Methods In Economics, Conference Proceedings
ISBN
978-80-7435-678-0
ISSN
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e-ISSN
neuvedeno
Number of pages
6
Pages from-to
442-447
Publisher name
Gaudeamus, University of Hradec Králové
Place of publication
Hradec Králové
Event location
Hradec Králové
Event date
Sep 13, 2017
Type of event by nationality
EUR - Evropská akce
UT code for WoS article
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