The Stochastic Balance Equation for the American Option Value Function and its Gradient

Malkhaz Shashiashvili

Papers from arXiv.org

Abstract: In the paper we consider the problem of valuation and hedging of American options written on dividend-paying assets whose price dynamics follow the multidimensional diffusion model. We derive a stochastic balance equation for the American option value function and its gradient. We prove that the latter pair is the unique solution of the stochastic balance equation as a result of the uniqueness in the related adapted future-supremum problem.

Date: 2021-02
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