Hints for an extension of the early exercise premium formula for American options

Hans-Peter Bermin, Arturo Kohatsu-Higa and Josep Perelló ()

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Abstract: Characterization of the American put option price is still an open issue. From the beginning of the nineties there exists a non-closed formula for this price but nontrivial numerical computations are required to solve it. Strong efforts have been done to propose methods more and more computationally efficient but most of them have few mathematical ground as to ascertain why these methods work well and how important is to consider a good approximation to the boundary or to the smooth pasting condition. We perform an extension of the American put price aiming to catch weaknesses of the numerical methods given in the literature.

Date: 2004-09
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Published in Physica A 355 (2005) 152-157.

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