A new integral equation formulation for American put options

Song-Ping Zhu, Xin-Jiang He and XiaoPing Lu

Quantitative Finance, 2018, vol. 18, issue 3, 483-490

Abstract: In this paper, a completely new integral equation for the price of an American put option as well as its optimal exercise price is successfully derived. Compared to existing integral equations for pricing American options, the new integral formulation has two distinguishable advantages: (i) it is in a form of one-dimensional integral, and (ii) it is in a form that is free from any discontinuity and singularities associated with the optimal exercise boundary at the expiry time. These rather unique features have led to a significant enhancement of the computational accuracy and efficiency as shown in the examples.

Date: 2018
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DOI: 10.1080/14697688.2017.1348617

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