Journal ArticleDOI
Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function
TLDR
In this article, the early exercise boundary of an American option is approximated as a multipiece exponential function and closed form formulas are obtained in terms of the bases and exponents of the function.Abstract:
This article proposes to price an American option by approximating its early exercise boundary as a multipiece exponential function. Closed form formulas are obtained in terms of the bases and exponents of the multipiece exponential function. It is demonstrated that a three-point extrapolation scheme has the accuracy of an 800-time-step binomial tree, but is about 130 times faster. An intuitive argument is given to indicate why this seemingly crude approximation works so well. Our method is very simple and easy to implement. Comparisons with other leading competing methods are also included. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.read more
Citations
More filters
Journal ArticleDOI
Option Pricing Under a Double Exponential Jump Diffusion Model
Steven Kou,Hui Wang +1 more
TL;DR: In this paper, the authors propose a jump diffusion model for asset prices whose jump sizes have a mixed-exponential distribution, which is a weighted average of exponential distributions but with possibly negative weights.
Journal ArticleDOI
Randomization and the American Put
TL;DR: In this paper, a semi-explicit approximation for American option values in the Black Scholes model was proposed, based on randomization, which yields an approximation that is both accurate and computationally efficient.
Journal ArticleDOI
Financial valuation of guaranteed minimum withdrawal benefits
TL;DR: In this paper, the authors developed a variety of methods for assessing the cost and value of a very popular "rider" available to North American investors on variable annuity (VA) policies called a Guaranteed Minimum Withdrawal Benefit (GMWB).
Journal ArticleDOI
An exact and explicit solution for the valuation of American put options
TL;DR: In this article, an exact and explicit solution of the well-known Black-Scholes equation for the valuation of American put options is presented for the first time, which is based on the homotopy-analysis method.
Journal ArticleDOI
Continuous-Time Methods in Finance: A Review and an Assessment
TL;DR: In this article, the authors survey the development of continuous-time methods in finance during the last 30 years and assess the use of continuous time models in finance, including derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices.
References
More filters
Journal ArticleDOI
The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
Book
Theory of rational option pricing
TL;DR: In this paper, the authors deduced a set of restrictions on option pricing formulas from the assumption that investors prefer more to less, which are necessary conditions for a formula to be consistent with a rational pricing theory.
Journal ArticleDOI
Option pricing: A simplified approach☆
TL;DR: In this paper, a simple discrete-time model for valuing options is presented, which is based on the Black-Scholes model, which has previously been derived only by much more difficult methods.
Journal ArticleDOI
Efficient Analytic Approximation of American Option Values
TL;DR: In this article, the authors provide simple, analytic approximations for pricing exchange-traded American call and put options written on commodities and commodity futures contracts, which are accurate and considerably more computationally efficient than finite-difference, binomial, or compound-option pricing methods.