Pricing American options written on two underlying assets
Carl Chiarella and
Quantitative Finance, 2014, vol. 14, issue 3, 409-426
This paper extends the integral transform approach of McKean [ Ind. Manage. Rev. , 1965, 6 , 32--39] and Chiarella and Ziogas [ J. Econ. Dyn. Control , 2005, 29 , 229--263] to the pricing of American options written on more than one underlying asset under the Black and Scholes [ J. Polit. Econ. , 1973, 81 , 637--659] framework. A bivariate transition density function of the two underlying stochastic processes is derived by solving the associated backward Kolmogorov partial differential equation. Fourier transform techniques are used to transform the partial differential equation to a corresponding ordinary differential equation whose solution can be readily found by using the integrating factor method. An integral expression of the American option written on any two assets is then obtained by applying Duhamel's principle. A numerical algorithm for calculating American spread call option prices is given as an example, with the corresponding early exercise boundaries approximated by linear functions. Numerical results are presented and comparisons made with other alternative approaches.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:14:y:2014:i:3:p:409-426
Ordering information: This journal article can be ordered from
Access Statistics for this article
Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral
More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().