We present an approximation method for pricing and hedging American options written on a dividend-paying asset. This method is based on Kim (1990) equations. We demonstrate that a simple approximation of the Kim integral equations by quadrature formulas leads to an efficient and accurate numerical procedure. This approximation is accompanied by the Newton--Raphson iteration procedure in order to compute the optimal exercise boundary at each time point. The proposed sequence of approximations converges monotonically, convergence is fast and accuracy is high, even for long maturity options. We compare numerically our results with other competing approaches by different authors.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).
Related research
Keywords:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)