Pricing American Options in a Mild Stochastic Environment
The problem of pricing derivative financial products is central to the theory of capital markets. An option is a financial contract conveying its owner the right of buying or selling a financial asset (underlying asset) at a preset strike price K, at a fixed expiration date T (maturity). Unlike European options, which can be exercised only at maturity date, an American option can be exercised at any time t prior to the maturity date. Most of the option pricing methods, starting with the well-known Black-Scholes model (1973), are based on the assumption that the market uncertainty can be modeled by a Wiener process. In this context, while it is possible to obtain convenient analytical option pricing formulae for European options, it is very difficult to obtain exact results for American options. In the present paper, we assume that the market uncertainty is modeled by a more regular stochastic process, which was called, by A. Halanay, a mild stochastic environment. In this context, we are able to obtain precise stopping rules, determining the exact exercise time and the exact price of an American option.
|Date of creation:||Jun 2008|
|Date of revision:|
|Contact details of provider:|| Postal: 6 ROMANA PLACE, 70167 - BUCHAREST|
Web page: http://www.dofin.ase.ro/carfib/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Geske, Robert & Johnson, Herb E, 1984. " The American Put Option Valued Analytically," Journal of Finance, American Finance Association, vol. 39(5), pages 1511-24, December.
- Roll, Richard, 1977. "An analytic valuation formula for unprotected American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 5(2), pages 251-258, November.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
When requesting a correction, please mention this item's handle: RePEc:cab:wpaefr:11. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ciprian Necula)The email address of this maintainer does not seem to be valid anymore. Please ask Ciprian Necula to update the entry or send us the correct email address
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.