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A simple numerical method for pricing American power put options

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  • Lee, Jung-Kyung

Abstract

In this paper, we present numerical methods to determine the optimal exercise boundary in case of an American power put option with non-dividend yields. The payoff of a power option is typified by its underlying share price raised to a constant power. The nonlinear payoffs of power options offer considerable flexibility to investors and can be applied in various applications. Herein, we exploit a transformed function to obtain the optimal exercise boundary of the American power put option. Employing it, we can easily determine the optimal exercise boundary. After determining the optimal exercise boundary, we calculate the American power put option values using the finite difference method. Generally, the optimal exercise boundary may not be observed at the grid points. Therefore, the interpolation method is used to determine the value of the American power put option. Furthermore, we present several numerical results obtained by comparing the proposed method and the existing methods.

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  • Lee, Jung-Kyung, 2020. "A simple numerical method for pricing American power put options," Chaos, Solitons & Fractals, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:chsofr:v:139:y:2020:i:c:s0960077920306500
    DOI: 10.1016/j.chaos.2020.110254
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    Cited by:

    1. Xinyue Wei & Cuilian You & Yujie Zhang, 2023. "European Option Pricing Under Fuzzy CEV Model," Journal of Optimization Theory and Applications, Springer, vol. 196(2), pages 415-432, February.
    2. Junkee Jeon & Geonwoo Kim, 2022. "Analytic Valuation Formula for American Strangle Option in the Mean-Reversion Environment," Mathematics, MDPI, vol. 10(15), pages 1-19, July.
    3. Chinonso Nwankwo & Weizhong Dai, 2020. "Explicit RKF-Compact Scheme for Pricing Regime Switching American Options with Varying Time Step," Papers 2012.09820, arXiv.org, revised Feb 2022.

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