Numerical solution of integral equation for early exercise boundary of American put option

Kód výsledku v 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>

Výsledek na webu

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DOI - Digital Object Identifier

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Jazyk výsledku

angličtina

Název v původním jazyce

Numerical solution of integral equation for early exercise boundary of American put option

Popis výsledku v původním jazyce

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.

Název v anglickém jazyce

Numerical solution of integral equation for early exercise boundary of American put option

Popis výsledku anglicky

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.

Druh

J_SC - Článek v periodiku v databázi SCOPUS

CEP obor

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OECD FORD obor

10103 - Statistics and probability

Projekt

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Návaznosti

S - Specificky vyzkum na vysokych skolach

Rok uplatnění

2017

Kód důvěrnosti údajů

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Název periodika

WSEAS Transaction on Business and Economics

ISSN

1109-9526

e-ISSN

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Svazek periodika

14

Číslo periodika v rámci svazku

26

Stát vydavatele periodika

US - Spojené státy americké

Počet stran výsledku

9

Strana od-do

235-243

Kód UT WoS článku

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EID výsledku v databázi Scopus

2-s2.0-85031290133