Pricing discounted American capped options

Tsvetelin S. Zaevski

Chaos, Solitons & Fractals, 2022, vol. 156, issue C

Abstract: The purpose of this paper is to present an efficient method for pricing discounted American capped options. They differ from the corresponding uncapped ones by the existing trigger level for the underlying asset. In such a way the option’s seller is preserved from the possible large movements of the underlying asset. We first obtain the optimal exercise region and by the use of some hitting properties we derive the fair option price. We use the Crank-Nicolson finite difference approach together with a Monte Carlo method to implement the obtained formulas. This method applied for the pricing problem of the ordinary American options has its own significance. Finally, we present some numerical results.

Keywords: American capped options; Optimal boundary; Optimal stopping time; Crank-Nicolson finite difference approach (search for similar items in EconPapers)
JEL-codes: C41 G12 G13 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:156:y:2022:i:c:s0960077922000443

DOI: 10.1016/j.chaos.2022.111833

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