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Approximate solutions for the British put option and its optimal exercise boundary

Journal Article


Abstract


  • British put options are financial derivatives with an early exercise feature whereby on payoff, the holder receives the best prediction of the European put payoff under the hypothesis that the true drift of the stock price is equal to a contract drift. In this paper, we derive simple analytic approximations for the optimal exercise boundary and the option valuation, valid for short expiry times – which is a common feature of most options traded in the market. Empirical results show that the approximations provide accurate results for expiries of at least up to two months.

Publication Date


  • 2016

Citation


  • Goard, J. M. (2016). Approximate solutions for the British put option and its optimal exercise boundary. Australia and New Zealand Industrial and Applied Mathematics (ANZIAM) Journal, 57 (3), 222-243.

Scopus Eid


  • 2-s2.0-84960296418

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/5310

Number Of Pages


  • 21

Start Page


  • 222

End Page


  • 243

Volume


  • 57

Issue


  • 3

Abstract


  • British put options are financial derivatives with an early exercise feature whereby on payoff, the holder receives the best prediction of the European put payoff under the hypothesis that the true drift of the stock price is equal to a contract drift. In this paper, we derive simple analytic approximations for the optimal exercise boundary and the option valuation, valid for short expiry times – which is a common feature of most options traded in the market. Empirical results show that the approximations provide accurate results for expiries of at least up to two months.

Publication Date


  • 2016

Citation


  • Goard, J. M. (2016). Approximate solutions for the British put option and its optimal exercise boundary. Australia and New Zealand Industrial and Applied Mathematics (ANZIAM) Journal, 57 (3), 222-243.

Scopus Eid


  • 2-s2.0-84960296418

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/5310

Number Of Pages


  • 21

Start Page


  • 222

End Page


  • 243

Volume


  • 57

Issue


  • 3