CALCULATING THE EARLY EXERCISE BOUNDARY OF AMERICAN PUT OPTIONS WITH AN APPROXIMATION FORMULA

Song-Ping Zhu () and Zhi-Wei He
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Song-Ping Zhu: School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW 2522, Australia
Zhi-Wei He: Faculty of Business, Ninbo University, Ninbo, Zhejiang, 315211, P. R. China

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 07, 1203-1227

Abstract: Accurately as well as efficiently calculating the early exercise boundary is the key to the highly nonlinear problem of pricing American options. Many analytical approximations have been proposed in the past, aiming at improving the computational efficiency and the easiness of using the formula, while maintaining a reasonable numerical accuracy at the same time. In this paper, we shall present an approximation formula based on Bunch and Johnson's work [6]. After clearly pointing out some errors in Bunch and Johnson's paper [6], we will propose an improved approximation formula that can significantly enhance the computational accuracy, particularly for options of long lifetime.

Keywords: Optimal exercise boundary; American put options; analytical approximations (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S0219024907004615

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