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Contribution Details
Type | Master's Thesis |
Scope | Discipline-based scholarship |
Title | Why is American Option Pricing so Complicated? |
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Institution | University of Zurich |
Faculty | Faculty of Business, Economics and Informatics |
Number of Pages | 103 |
Date | 2020 |
Abstract Text | American option pricing requires to solve an optimal stopping problem with no known exact closed-form solution. The option price computation essentially centers around determining the time dependent so-called early exercise boundary. Modelling the underlying process as a geometric Brownian motion, we propose a novel closed formula to approximate the early exercise boundary within a framework with both continuous and discrete dividends. Applying this result, we suggest an extended local volatility formula to calibrate American option market prices and overcome the limitations of our initial underlying model assumptions. |
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