The Early Exercise Premium Representation for American Options on Multiply Assets

Journal Article · Mon Feb 15 00:00:00 EST 2016 · Applied Mathematics and Optimization

DOI:https://doi.org/10.1007/S00245-015-9293-5· OSTI ID:22469614

Klimsiak, Tomasz; Rozkosz, Andrzej ^[1]

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1. Nicolaus Copernicus University, Faculty of Mathematics and Computer Science (Poland)

In the paper we consider the problem of valuation of American options written on dividend-paying assets whose price dynamics follow the classical multidimensional Black and Scholes model. We provide a general early exercise premium representation formula for options with payoff functions which are convex or satisfy mild regularity assumptions. Examples include index options, spread options, call on max options, put on min options, multiply strike options and power-product options. In the proof of the formula we exploit close connections between the optimal stopping problems associated with valuation of American options, obstacle problems and reflected backward stochastic differential equations.

• OSTI ID: 22469614
• Journal Information: Applied Mathematics and Optimization, Vol. 73, Issue 1; Other Information: Copyright (c) 2016 Springer Science+Business Media New York; Article Copyright (c) 2015 The Author(s); http://www.springer-ny.com; Country of input: International Atomic Energy Agency (IAEA); ISSN 0095-4616
• Country of Publication: United States
• Language: English

Related Subjects

71 CLASSICAL AND QUANTUM MECHANICS
GENERAL PHYSICS
CALCULATION METHODS
DIFFERENTIAL EQUATIONS
FUNCTIONS
MATHEMATICAL MODELS
MATHEMATICAL SOLUTIONS
STOCHASTIC PROCESSES