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On a free boundary problem for an American put option under the CEV process

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  • Miao Xu
  • Charles Knessl

Abstract

We consider an American put option under the CEV process. This corresponds to a free boundary problem for a PDE. We show that this free bondary satisfies a nonlinear integral equation, and analyze it in the limit of small $\rho$ = $2r/ \sigma^2$, where $r$ is the interest rate and $\sigma$ is the volatility. We use perturbation methods to find that the free boundary behaves differently for five ranges of time to expiry.

Suggested Citation

  • Miao Xu & Charles Knessl, 2010. "On a free boundary problem for an American put option under the CEV process," Papers 1009.2973, arXiv.org, revised Sep 2010.
    • Handle: RePEc:arx:papers:1009.2973
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