Numerical solution of integral equation for early exercise boundary of American put option
The result's identifiers
Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F49777513%3A23510%2F17%3A43933135" target="_blank" >RIV/49777513:23510/17:43933135 - isvavai.cz</a>
Result on the web
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DOI - Digital Object Identifier
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Alternative languages
Result language
angličtina
Original language name
Numerical solution of integral equation for early exercise boundary of American put option
Original language description
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 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. However, the integral equation is known for determination of early exercise boundary. We propose an iterative procedure for numerical solution of that integral equation. We discuss the construction of initial approximations, and we also describe the steps of our submitted procedure in details. Finally, we present some numerical results of determination of free boundary based upon this approach. All computations are performed by the sw Mathematica, version 11.1.
Czech name
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Czech description
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Classification
Type
J<sub>SC</sub> - Article in a specialist periodical, which is included in the SCOPUS database
CEP classification
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OECD FORD branch
10103 - Statistics and probability
Result continuities
Project
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Continuities
S - Specificky vyzkum na vysokych skolach
Others
Publication year
2017
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů
Data specific for result type
Name of the periodical
WSEAS Transaction on Business and Economics
ISSN
1109-9526
e-ISSN
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Volume of the periodical
14
Issue of the periodical within the volume
26
Country of publishing house
US - UNITED STATES
Number of pages
9
Pages from-to
235-243
UT code for WoS article
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EID of the result in the Scopus database
2-s2.0-85031290133