American option valuation using first-passage densities

Producció científica: Contribució a revistaArticleRecercaAvaluat per experts

9 Cites (Scopus)

Resum

This paper explores the advantages of pricing American options using the first-passage density of a Brownian motion to a curved barrier. First, we demonstrate that, under this approach, the exact computation of the optimal boundary becomes secondary. Consequently, a simple approximation to the optimal boundary suffices to obtain accurate prices. Moreover, the first-passage approach tends to give more accurate prices than the early-exercise-premium integral representation. We present two ways of implementing the approach. The first is based on an exact representation of the first-passage density. The second exploits the method of images, which gives us a family of barriers with first-passage densities given in closed form. Both methods are very easy to implement and give accurate prices. In particular, the images-based method is extremely accurate. © 2013 Taylor & Francis.
Idioma originalAnglès
Pàgines (de-a)1831-1843
RevistaQuantitative Finance
Volum13
Número11
DOIs
Estat de la publicacióPublicada - 2 d’ag. 2013

Fingerprint

Navegar pels temes de recerca de 'American option valuation using first-passage densities'. Junts formen un fingerprint únic.

Com citar-ho