Pricing American options when asset prices jump

A. Chockalingam, K. Muthuraman

Research output: Contribution to journalArticleAcademicpeer-review

7 Citations (Scopus)
1 Downloads (Pure)

Abstract

We present a transformation that helps price American options on assets that are modeled by a diffusion as well as a jump component. The presence of a jump component circumvents some shortcomings of the Black–Scholes model. The proposed transformation essentially transforms the arising free-boundary partial integro-differential equation (PIDE) into a sequence of fixed-boundary PIDEs which are much easier to solve. Finally, we provide numerical results illustrating convergence of the scheme and comparisons to other methods.
Original languageEnglish
Pages (from-to)82-86
Number of pages5
JournalOperations Research Letters
Volume38
Issue number2
DOIs
Publication statusPublished - 2010
Externally publishedYes

Fingerprint

American Options
Integrodifferential equations
Pricing
Jump
Partial Integro-differential Equation
Black-Scholes Model
Free Boundary
Costs
Transform
Numerical Results
Asset prices
American option pricing
Integro-differential equation
Free boundary
Assets
American options
Black-Scholes model

Cite this

Chockalingam, A. ; Muthuraman, K. / Pricing American options when asset prices jump. In: Operations Research Letters. 2010 ; Vol. 38, No. 2. pp. 82-86.
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Pricing American options when asset prices jump. / Chockalingam, A.; Muthuraman, K.

In: Operations Research Letters, Vol. 38, No. 2, 2010, p. 82-86.

Research output: Contribution to journalArticleAcademicpeer-review

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AB - We present a transformation that helps price American options on assets that are modeled by a diffusion as well as a jump component. The presence of a jump component circumvents some shortcomings of the Black–Scholes model. The proposed transformation essentially transforms the arising free-boundary partial integro-differential equation (PIDE) into a sequence of fixed-boundary PIDEs which are much easier to solve. Finally, we provide numerical results illustrating convergence of the scheme and comparisons to other methods.

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