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Hints for an extension of the early exercise premium formula for American options

Author

Listed:
  • Bermin, Hans-Peter
  • Kohatsu-Higa, Arturo
  • Perelló, Josep

Abstract

There exists a non-closed formula for the American put option price and non-trivial computations are required to solve it. Strong efforts have been made to propose efficient numerical techniques but few have strong mathematical reasoning to ascertain why they work well. We present an extension of the American put price aiming to catch weaknesses of the numerical methods based on their non-fulfillment of the smooth pasting condition.

Suggested Citation

  • Bermin, Hans-Peter & Kohatsu-Higa, Arturo & Perelló, Josep, 2005. "Hints for an extension of the early exercise premium formula for American options," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 152-157.
  • Handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:152-157
    DOI: 10.1016/j.physa.2005.02.077
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    Cited by:

    1. Tomonori Nakatsu, 2017. "An Integration by Parts Type Formula for Stopping Times and its Application," Methodology and Computing in Applied Probability, Springer, vol. 19(3), pages 751-773, September.

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