The Valuation of American Options on Multiple Assets

Posted: 2 Oct 1999

See all articles by Jerome Detemple

Jerome Detemple

Boston University - Department of Finance & Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Mark Broadie

Columbia University - Columbia Business School - Decision Risk and Operations

Date Written: July 1994

Abstract

In this paper we provide valuation formulas for several types of American options on two or more assets. First we characterize the optimal exercise regions and provide valuation formulas for a number of American option contracts on multiple underlying assets with convex payoff functions. Examples include options on the maximum of two assets, dual strike options, spread options, exchange options, options on the product and powers of the product, and options on the arithmetic average of two assets. Second, we also consider a class of contracts with non-convex payoffs, such as American capped exchange options. For this option we explicitly identify the optimal exercise boundary and provide a decomposition of the price in terms of a capped exchange option with automatic exercise at the cap and an early exercise premium involving the benefits of exercising prior to reaching the cap.

JEL Classification: G12, G13

Suggested Citation

Detemple, Jerome and Broadie, Mark, The Valuation of American Options on Multiple Assets (July 1994). Available at SSRN: https://ssrn.com/abstract=5449

Jerome Detemple

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 353-4297 (Phone)
(617) 353 6667 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

Mark Broadie (Contact Author)

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States
212-854-4103 (Phone)

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