Quantized Interest Rate at the Money for American Options

L. M. Dieng

Papers from arXiv.org

Abstract: In this work, we expand the idea of Samuelson[3] and Shepp[2,5,6] for stock optimization using the Bachelier model [4] as our models for the stock price at the money (X[stock price]= K[strike price]) for the American call and put options [1]. At the money (X= K) for American options, the expected payoff of both the call and put options is zero. Shepp investigated several stochastic optimization problems using martingale and stopping time theories [2,5,6]. One of the problems he investigated was how to optimize the stock price using both the Black-Scholes (multiplicative) and the Bachelier (additive) models [7,6] for the American option above the strike price K (exercise price) to a stopping point. In order to explore the non-relativistic quantum effect on the expected payoff for both the call and put options at the money, we assumed the stock price to undergo a stochastic process governed by the Bachelier (additive) model [4]. Further, using Ito calculus and martingale theory, we obtained a differential equation for the expected payoff for both the call and put options in terms of delta and gamma. We also obtained the solution to the non-relativistic Schroedinger equation as the expected payoff for both the call and put options. Then, we expressed the stochastic process that is the expected payoff for both the call and put options at the money in terms of the solution to the Schroedinger equation. We concluded the stochastic process that is the expected payoff at the money for both options to be an oscillatory function with quantized interest rates.

Date: 2009-02, Revised 2009-03
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/0902.4684 Latest version (application/pdf)

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:arx:papers:0902.4684

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().