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An Asymptotic Analysis of an American Call Option with Small Volatility

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  • N.P. Firth
  • J.N. Dewynne
  • S. J. Chapman
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    Abstract

    In this paper we present an asymptotic analysis of an American call option where the diffusion term (volatility) is small compared to the drift terms (interest rate and continuous dividend yield). We show that in the limit where diffusion is negligible, relative to drift, then, at leading order, the American call’s behaviour is the same as a perpetual American call option (except in a boundary layer about the option’s expiry date).

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    Bibliographic Info

    Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2004mf03.

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    Date of creation: 2004
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    Handle: RePEc:sbs:wpsefe:2004mf03

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