ON THE AMERICAN OPTION PROBLEM

Goran Peskir

Mathematical Finance, 2005, vol. 15, issue 1, 169-181

Abstract: We show how the change‐of‐variable formula with local time on curves derived recently in Peskir (2002) can be used to prove that the optimal stopping boundary for the American put option can be characterized as the unique solution of a nonlinear integral equation arising from the early exercise premium representation. This settles the question raised in Myneni (1992) and dating back to McKean (1965).

Date: 2005
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