An Exact Formula for Pricing American Exchange Options with Regime Switching

Leunglung Chan ()
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Leunglung Chan: University of New South Wales

Chapter Chapter 9 in Hidden Markov Models in Finance, 2014, pp 211-226 from Springer

Abstract: Abstract This paper investigates the pricing of American exchange options when the price dynamics of each underlying risky asset are assumed to follow a Markov-modulated Geometric Brownian motion; that is, the appreciation rate and the volatility of each underlying risky asset depend on unobservable states of the economy described by a continuous-time hidden Markov process. We show that the price of an American exchange option can be reduced to the price of an American option. Then, we modify the result of Zhu and Chan (An analytic formula for pricing American options with regime switching. Submitted for publication, 2012), a closed-form analytical pricing formula for the American exchange option is given.

Keywords: American Exchange Option; Regime Switching; Spread Options; Homotopy Analysis Method (HAM); Partial Differential Equations (PDEs) (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-1-4899-7442-6_9

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DOI: 10.1007/978-1-4899-7442-6_9

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