EconPapers    
Economics at your fingertips  
 

Pricing American options written on two underlying assets

Carl Chiarella and Jonathan Ziveyi

Quantitative Finance, 2014, vol. 14, issue 3, 409-426

Abstract: 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.

Date: 2014
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)
http://hdl.handle.net/10.1080/14697688.2013.810811 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

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
http://www.tandfonline.com/pricing/journal/RQUF20

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 ().

 
Page updated 2019-10-16
Handle: RePEc:taf:quantf:v:14:y:2014:i:3:p:409-426