Advanced Search
MyIDEAS: Login

Pricing and Hedging American Options Using Approximations by Kim Integral Equations

Contents:

Author Info

  • Siim Kallast

    ()

  • Andi Kivinukk

    ()

Registered author(s):

    Abstract

    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

    If you experience problems downloading a file, check if you have the proper application to view it first. 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.
    File URL: http://journals.kluweronline.com/issn/1382-6662/contents
    Download Restriction: no

    Bibliographic Info

    Article provided by Springer in its journal European Finance Review.

    Volume (Year): 7 (2003)
    Issue (Month): 3 ()
    Pages: 361-383

    as in new window
    Handle: RePEc:kap:eurfin:v:7:y:2003:i:3:p:361-383

    Contact details of provider:
    Web page: http://springerlink.metapress.com/link.asp?id=111870

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Song-Ping Zhu & Jing Zhang, 2012. "How should a convertible bond be decomposed?," Decisions in Economics and Finance, Springer, vol. 35(2), pages 113-149, November.
    2. Thomas Adolfsson & Carl Chiarella & Andrew Ziogas & Jonathan Ziveyi, 2013. "Representation and Numerical Approximation of American Option Prices under Heston Stochastic Volatility Dynamics," Research Paper Series 327, Quantitative Finance Research Centre, University of Technology, Sydney.
    3. Jonathan Treussard & Doriana Ruffino, 2007. "Lumps and Clusters in Duopolistic Investment Games: An Early Exercise Premium Approach," 2007 Meeting Papers 77, Society for Economic Dynamics.
    4. Carl Chiarella & Andrew Ziogas, 2006. "American Call Options on Jump-Diffusion Processes: A Fourier Transform Approach," Research Paper Series 174, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Minqiang Li, Li, 2009. "Analytical Approximations for the Critical Stock Prices of American Options: A Performance Comparison," MPRA Paper 15018, University Library of Munich, Germany.
    6. Detemple, Jérôme & Emmerling, Thomas, 2009. "American chooser options," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 128-153, January.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:kap:eurfin:v:7:y:2003:i:3:p:361-383. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.