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Analysis of the optimal exercise boundary of American put options with delivery lags

Gechun Liang () and Zhou Yang

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Abstract: A make-your-mind-up option is an American derivative with delivery lags. We show that its put option can be decomposed as a European put and a new type of American-style derivative. The latter is an option for which the investor receives the Greek Theta of the corresponding European option as the running payoff, and decides an optimal stopping time to terminate the contract. Based on this decomposition and using free boundary techniques, we show that the associated optimal exercise boundary exists and is a strictly increasing and smooth curve, and analyze the asymptotic behavior of the value function and the optimal exercise boundary for both large maturity and small time lag.

Date: 2018-05, Revised 2020-12
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Handle: RePEc:arx:papers:1805.02909