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American chooser options

  • Detemple, Jérôme
  • Emmerling, Thomas
Registered author(s):

    This paper examines the valuation of American chooser options, i.e., American-style contracts written on the maximum of an American put and an American call. The structure of the immediate exercise region is examined. The early exercise premium representation of the chooser's price is derived and used to construct a system of coupled recursive integral equations for a pair of boundary components. Numerical implementations of the model based on this system are carried out and used to examine the boundary properties and the price behavior.

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    File URL: http://www.sciencedirect.com/science/article/B6V85-4SMDYWD-1/2/08bf6dd51522c7c00d8f2bd4ceb76ae9
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    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 33 (2009)
    Issue (Month): 1 (January)
    Pages: 128-153

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    Handle: RePEc:eee:dyncon:v:33:y:2009:i:1:p:128-153
    Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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    1. Gao, Bin & Huang, Jing-zhi & Subrahmanyam, Marti, 2000. "The valuation of American barrier options using the decomposition technique," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1783-1827, October.
    2. Marek Rutkowski, 1994. "The Early Exercise Premium Representation Of Foreign Market American Options," Mathematical Finance, Wiley Blackwell, vol. 4(4), pages 313-325.
    3. Ju, Nengjiu, 1998. "Pricing an American Option by Approximating Its Early Exercise Boundary as a Multipiece Exponential Function," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 627-46.
    4. S. D. Jacka, 1991. "Optimal Stopping and the American Put," Mathematical Finance, Wiley Blackwell, vol. 1(2), pages 1-14.
    5. Schroder, Mark, 1999. "Changes of Numeraire for Pricing Futures, Forwards, and Options," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1143-63.
    6. Huang, Jing-zhi & Subrahmanyam, Marti G & Yu, G George, 1996. "Pricing and Hedging American Options: A Recursive Integration Method," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 277-300.
    7. Siim Kallast & Andi Kivinukk, 2003. "Pricing and Hedging American Options Using Approximations by Kim Integral Equations," Review of Finance, Springer, vol. 7(3), pages 361-383.
    8. Carl Chiarella & Andrew Ziogas, 2002. "Evaluation of American Strangles," Research Paper Series 83, Quantitative Finance Research Centre, University of Technology, Sydney.
    9. Peter Carr & Robert Jarrow & Ravi Myneni, 1992. "Alternative Characterizations Of American Put Options," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 87-106.
    10. Mark Broadie & Jér�me Detemple, 1997. "The Valuation of American Options on Multiple Assets," Mathematical Finance, Wiley Blackwell, vol. 7(3), pages 241-286.
    11. Broadie, Mark & Detemple, Jerome, 1996. "American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods," Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1211-50.
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