An integral equation for American put options on assets with general dividend processes

M. H. Vellekoop; J. W. Nieuwenhuis

doi:10.1080/17442508.2010.533179

An integral equation for American put options on assets with general dividend processes

M. H. Vellekoop^*, J. W. Nieuwenhuis

^*Corresponding author for this work

Research output: Contribution to journal › Article › Academic › peer-review

2 Citations (Scopus)

Abstract

The difference between an American put option and its European counterpart has been characterized in terms of a simple integral expression which can be used to calculate the optimal exercise boundary in a recursive manner, if Black-Scholes dynamics are assumed for the underlying asset. In this paper, we extend this formula to the case where a more general stock and cumulative dividend process are included, and show how this changes the properties of the optimal exercise boundary.

Original language	English
Pages (from-to)	555-567
Number of pages	13
Journal	Stochastics-An international journal of probability and stochastic processes
Volume	83
Issue number	4-6
DOIs	https://doi.org/10.1080/17442508.2010.533179
Publication status	Published - 2011

Keywords

American option
early exercise premium
dividends
VALUATION

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An integral equation for American put options on assets with general dividend processes
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AB - The difference between an American put option and its European counterpart has been characterized in terms of a simple integral expression which can be used to calculate the optimal exercise boundary in a recursive manner, if Black-Scholes dynamics are assumed for the underlying asset. In this paper, we extend this formula to the case where a more general stock and cumulative dividend process are included, and show how this changes the properties of the optimal exercise boundary.

KW - American option

KW - early exercise premium

KW - dividends

KW - VALUATION

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DO - 10.1080/17442508.2010.533179

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EP - 567

JO - Stochastics-An international journal of probability and stochastic processes

JF - Stochastics-An international journal of probability and stochastic processes

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