Hints for an Extension of the Early Exercise Premium Formula for American Options

7 Pages Posted: 13 Dec 2004

See all articles by Hans-Peter Bermin

Hans-Peter Bermin

Lund University, Department of Economics

Arturo Kohatsu-Higa

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Josep Perelló

University of Barcelona - Department of Physics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2004

Abstract

The characterization of the American put option price is still an open issue. From the beginning of the nineties there exists a non-closed formula for this price but nontrivial numerical computations are required to solve it. Strong efforts have been made to propose computational efficient methods but few of them have strong mathematical reasoning to ascertain why these methods work well and how important it is to consider a good approximation to the boundary or to the smooth pasting condition. We present an extension of the American put price aiming to catch weaknesses of the numerical methods given in the literature.

Keywords: American put, Black-Scholes pricing, computational methods

Suggested Citation

Bermin, Hans-Peter and Kohatsu-Higa, Arturo and Perello, Josep, Hints for an Extension of the Early Exercise Premium Formula for American Options (December 2004). Available at SSRN: https://ssrn.com/abstract=632164 or http://dx.doi.org/10.2139/ssrn.632164

Hans-Peter Bermin

Lund University, Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

Arturo Kohatsu-Higa

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 50 (Phone)
(34-93) 542 17 46 (Fax)

Josep Perello (Contact Author)

University of Barcelona - Department of Physics ( email )

Diagonal, 647
Barcelona, E-08028
Spain
+34 9 34021150 (Phone)
+34 34021149 (Fax)

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