A Simple Iterative Method for the Valuation of American Options
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- Title
- A Simple Iterative Method for the Valuation of American Options
- Authors
- In Joon Kim; Jang, BG; Kyeong Tae Kim
- Date Issued
- 2013-06-01
- Publisher
- ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
- Abstract
- We introduce a simple iterative method to determine the optimal exercise boundary for American options, allowing us to compute the values of American options and their Greeks quickly and accurately. Following Little, Pant and Hou's idea (2000), we derive a new equation for the optimal exercise boundary containing a single integral. The proposed method is an iterative numerical method for finding its solution. Using it, we can calculate the entire optimal exercise boundary in a non-time-recursive way, in contrast to conventional methods. Extensive numerical results indicate that our method is computationally more efficient than the methods currently available, particularly for hedge ratios.
- Keywords
- Option pricing; American option; Early exercise boundary; Numerical approach; Iterative method; C; C6; C63; G; G1; G13; ANALYTIC APPROXIMATION; VALUING AMERICAN; BOUNDARY
- URI
- https://oasis.postech.ac.kr/handle/2014.oak/14921
- DOI
- 10.1080/14697688.2012.696780
- ISSN
- 1469-7688
- Article Type
- Article
- Citation
- QUANTITATIVE FINANCE, vol. 13, no. 6, page. 885 - 895, 2013-06-01
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