Pricing American options when asset prices jump

A. Chockalingam; K. Muthuraman

doi:10.1016/j.orl.2009.11.001

Pricing American options when asset prices jump

A. Chockalingam, K. Muthuraman

Onderzoeksoutput: Bijdrage aan tijdschrift › Tijdschriftartikel › Academic › peer review

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Samenvatting

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.

Originele taal-2	Engels
Pagina's (van-tot)	82-86
Aantal pagina's	5
Tijdschrift	Operations Research Letters
Volume	38
Nummer van het tijdschrift	2
DOI's	https://doi.org/10.1016/j.orl.2009.11.001
Status	Gepubliceerd - 2010
Extern gepubliceerd	Ja

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10.1016/j.orl.2009.11.001

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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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