On the methods of pricing American options: case study

Date

2018-01-01

Author

AYDOGAN, Burcu
Aksoy, Umit
Uğur, Ömür

Metadata

Show full item record

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Item Usage Stats

2
views

0
downloads

In this study, a comparative analysis of numerical and approximation methods for pricing American options is performed. Binomial and finite difference approximations are discussed; furthermore, Roll-Geske-Whaley, Barone-Adesi and Whaley and Bjerksund-Stensland analytical approximations as well as the least-squares Monte Carlo method of Longstaff and Schwartz are presented. Applicability and efficiency in almost all circumstances, numerical solutions of the corresponding free boundary problem is emphasized. Methods used in pricing American options are also compared on dividend and non-dividend paying assets; and their pros and cons are discussed along with numerical experiments.

Subject Keywords

American Options, Numerical Methods, Analytical Approximations, Bounds

URI

https://hdl.handle.net/11511/32580

Collections

Graduate School of Applied Mathematics, Article