Pricing American options when asset prices jump

A. Chockalingam, K. Muthuraman

Research output: Contribution to journalArticleAcademicpeer-review

9 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

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