European Option, American Option, and Option Bounds: Theory, Method, and Some Empirical Results

Cheng Few Lee

Chapter 77 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 2393-2429 from World Scientific Publishing Co. Pte. Ltd.

Abstract: It is well known that both normal and log-normal distributions are important to understand Black & Scholes-type European and American options. Therefore, we first review the basic theory of normal and log-normal distributions and their relationship, then bivariate and multivariate normal density functions are analyzed in detail. Next, we discuss American options in terms of random dividend payment. We then use bivariate normal density function to analyze American options with random dividend payment. Excel programs are used to show how American co-options can be evaluated. Finally, pricing option bounds are analyzed in some detail.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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