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Evaluating approximations to the optimal exercise boundary for American options

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  • Roland Mallier

Abstract

We consider series solutions for the location of the optimal exercise boundary of an American option close to expiry. By using Monte Carlo methods, we compute the expected value of an option if the holder uses the approximate location given by such a series as his exercise strategy, and compare this value to the actual value of the option. This gives an alternative method to evaluate approximations. We find the series solution for the call performs excellently under this criterion, even for large times, while the asymptotic approximation for the put is very good near to expiry but not so good further from expiry.

Suggested Citation

  • Roland Mallier, 2002. "Evaluating approximations to the optimal exercise boundary for American options," Journal of Applied Mathematics, Hindawi, vol. 2, pages 1-22, January.
    • Handle: RePEc:hin:jnljam:807303
    DOI: 10.1155/S1110757X02000268
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    Cited by:

    1. Luca Vincenzo Ballestra, 2018. "Fast and accurate calculation of American option prices," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(2), pages 399-426, November.
    2. Jonathan Ziveyi, 2011. "The Evaluation of Early Exercise Exotic Options," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2011.
    3. Leunglung Chan & Song-Ping Zhu, 2021. "An Analytic Approach for Pricing American Options with Regime Switching," JRFM, MDPI, vol. 14(5), pages 1-20, April.

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