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Optimal exercise boundary for an American put option

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  • Rachel Kuske
  • Joseph Keller
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    Abstract

    The optimal exercise boundary near the expiration time is determined for an American put option. It is obtained by using Green's theorem to convert the boundary value problem for the price of the option into an integral equation for the optimal exercise boundary. This integral equation is solved asymptotically for small values of the time to expiration. The leading term in the asymptotic solution is the result of Barles et al. An asymptotic solution for the option price is obtained also.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/135048698334673
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 5 (1998)
    Issue (Month): 2 ()
    Pages: 107-116

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    Handle: RePEc:taf:apmtfi:v:5:y:1998:i:2:p:107-116

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: Put Option; Exercise Boundary; American Option; Free Boundary;

    References

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    1. Kim, In Joon, 1990. "The Analytic Valuation of American Options," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 547-72.
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    Citations

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    Cited by:
    1. Tomas Bokes & Daniel Sevcovic, 2009. "Early exercise boundary for American type of floating strike Asian option and its numerical approximation," Papers 0912.1321, arXiv.org.
    2. Chung, San-Lin & Shih, Pai-Ta, 2009. "Static hedging and pricing American options," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2140-2149, November.
    3. Daniel Sevcovic, 2007. "An iterative algorithm for evaluating approximations to the optimal exercise boundary for a nonlinear Black-Scholes equation," Papers 0710.5301, arXiv.org.
    4. Chung, Y. Peter & Johnson, Herb & Polimenis, Vassilis, 2011. "The critical stock price for the American put option," Finance Research Letters, Elsevier, vol. 8(1), pages 8-14, March.
    5. Roland Mallier & Ghada Alobaidi, 2000. "Laplace transforms and American options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(4), pages 241-256.
    6. Hsuan-Ku Liu, 2013. "The Convexity of the Free Boundary for American-style put options," Papers 1304.5337, arXiv.org, revised Jun 2014.

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