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Perpetual American options in a diffusion model with piecewise-linear coefficients
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Pavel V. Gapeev
Published/Copyright:
March 6, 2013
Abstract
We derive closed form solutions to the discounted optimal stopping problems related to the pricing of the perpetual American standard put and call options in an extension of the Black–Merton–Scholes model with piecewise-constant dividend and volatility rates. The method of proof is based on the reduction of the initial optimal stopping problems to the associated free-boundary problems and the subsequent martingale verification using a local time-space formula. We present explicit algorithms to determine the constant hitting thresholds for the underlying asset price process, which provide the optimal exercise boundaries for the options.
Keywords: Discounted optimal stopping problem; Perpetual American options; Diffusion process with piecewise-linear coefficients; First hitting time; Free-boundary problem
Published Online: 2013-03-06
Published in Print: 2013-03
© by Oldenbourg Wissenschaftsverlag, München, Germany
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- Perpetual American options in a diffusion model with piecewise-linear coefficients
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Articles in the same Issue
- Perpetual American options in a diffusion model with piecewise-linear coefficients
- Properties of hierarchical Archimedean copulas
- Rate of convergence of the density estimation of regression residual
- A functional conditional symmetry test for a GARCH-SM model: Power asymptotic properties
