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Calculating The Early Exercise Boundary of American Put Options with an Approximation Formula

Journal Article


Abstract


  • Accurately as well as efficiently calculating the early exercise boundary is the key to the highly nonlinear problem of pricing American options. Many analytical approximations have been proposed in the past, aiming at improving the computational efficiency and the easiness of using the formula, while maintaining a reasonable numerical accuracy at the same time. In this paper, we shall presend an approximation formula based on Bunch and Johnsons work. After clearly pointing out some errors in Bunch and Johnson's paper, we will propse an improved approximation formula that can significantly enhance the computational accuracy, particularly for options of long lifetime.

Publication Date


  • 2007

Citation


  • Zhu, S. & He, Z. (2007). Calculating The Early Exercise Boundary of American Put Options with an Approximation Formula. International Journal of Theoretical and Applied Finance, 10 (7), 1203-1227.

Scopus Eid


  • 2-s2.0-36549051216

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/3064

Has Global Citation Frequency


Number Of Pages


  • 24

Start Page


  • 1203

End Page


  • 1227

Volume


  • 10

Issue


  • 7

Abstract


  • Accurately as well as efficiently calculating the early exercise boundary is the key to the highly nonlinear problem of pricing American options. Many analytical approximations have been proposed in the past, aiming at improving the computational efficiency and the easiness of using the formula, while maintaining a reasonable numerical accuracy at the same time. In this paper, we shall presend an approximation formula based on Bunch and Johnsons work. After clearly pointing out some errors in Bunch and Johnson's paper, we will propse an improved approximation formula that can significantly enhance the computational accuracy, particularly for options of long lifetime.

Publication Date


  • 2007

Citation


  • Zhu, S. & He, Z. (2007). Calculating The Early Exercise Boundary of American Put Options with an Approximation Formula. International Journal of Theoretical and Applied Finance, 10 (7), 1203-1227.

Scopus Eid


  • 2-s2.0-36549051216

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/3064

Has Global Citation Frequency


Number Of Pages


  • 24

Start Page


  • 1203

End Page


  • 1227

Volume


  • 10

Issue


  • 7