Pricing problems of perpetual Bermudan options
AbstractThe pricing problem of options with an early exercise feature, such as American options, is one of the important topics in mathematical finance. The pricing formulas for American options, however, have not been found in general and the numerical methods are required to derive the price of these options, besides some exceptions, such as perpetual American options. Although the closed form pricing formula for perpetual American options in the Black and Scholes economy is known explicitly, it seems that the pricing formula for perpetual Bermudan options is not known. The value function of perpetual Bermudan options is characterized with the partial differential equation and this is solved numerically in this article
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 345.
Date of creation: 04 Jul 2006
Date of revision:
perpetual Bermudan options; optimal stopping problems; linear complementarity problem; PSOR algorithm; linear programming methods; interior point methods;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- M. A. H. Dempster & J. P. Hutton, 1999. "Pricing American Stock Options by Linear Programming," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 229-254.
- S. D. Jacka, 1991. "Optimal Stopping and the American Put," Mathematical Finance, Wiley Blackwell, vol. 1(2), pages 1-14.
- Brennan, Michael J & Schwartz, Eduardo S, 1977. "The Valuation of American Put Options," Journal of Finance, American Finance Association, vol. 32(2), pages 449-62, May.
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