Pricing American exchange options in a jump‐diffusion model

Snorre Lindset

Journal of Futures Markets, 2007, vol. 27, issue 3, 257-273

Abstract: A way to estimate the value of an American exchange option when the underlying assets follow jump‐diffusion processes is presented. The estimate is based on combining a European exchange option and a Bermudan exchange option with two exercise dates by using Richardson extrapolation as proposed by R. Geske and H. Johnson (1984). Closed‐form solutions for the values of European and Bermudan exchange options are derived. Several numerical examples are presented, illustrating that the early exercise feature may have a significant economic value. The results presented should have potential for pricing over‐the‐counter options and in particular for pricing real options. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:257–273, 2007

Date: 2007
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