Download This PaperA Replicating Portfolio Approach to Valuing American Options in Closed-Form
12 Pages Posted: 9 Jan 2021 Last revised: 19 Feb 2021
Date Written: November 19, 2020
Abstract
I derive closed-form expressions for the value of American call and put options (on an asset with continuous yield) using the Feynman-Kac formula, modelling the size of early exercise premium as a function of the strike, dividend yield and time to maturity. Strategies involving European options and binary options on forwards on the asset replicate an American option exactly. Violations of Put-Call parity for American options is also explored in this framework.
Keywords: Rational Pricing, American Options, Static Replicating Portfolio
JEL Classification: C32, G13
Suggested Citation: Suggested Citation
Khan, Muhammad, A Replicating Portfolio Approach to Valuing American Options in Closed-Form (November 19, 2020). Available at SSRN: https://ssrn.com/abstract=3733258 or http://dx.doi.org/10.2139/ssrn.3733258
Do you have a job opening that you would like to promote on SSRN?
Feedback
Feedback to SSRN
If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday.