Laplace transforms and American options

Roland Mallier and Ghada Alobaidi

Applied Mathematical Finance, 2000, vol. 7, issue 4, 241-256

Abstract: Laplace transform methods are used to study the valuation of American call and put options with constant dividend yield, and to derive integral equations giving the location of the optimal exercise boundary. In each case studied, the main result of this paper is a nonlinear Fredholm-type integral equation for the location of the free boundary. The equations differ depending on whether the dividend yield is less than or exceeds the risk-free rate. These integral equations contain a transform variable, so the solution of the equations would involve finding the free boundary that satisfies the equations for all values of this transform variable. Expressions are also given for the transform of the value of the option in terms of this free boundary.

Keywords: Laplace Transforms; American Options; Optimal Exercise Boundary; Dividend Yield; Fredholm-TYPE Integral Equation (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1080/13504860110060384

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