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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | American Options with Stopping Time Constraints |
| Organization Unit | |
| Authors |
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| Language |
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| Series Name | SSRN |
| Number | 798124 |
| Number of Pages | 19 |
| Date | 2005 |
| Abstract Text | This paper concerns the pricing of American options with stochastic stopping time constraints expressed in terms of the states of a Markov process. Following the ideas of Menaldi, Robin and Sun [21] we transform the constrained into an unconstrained optimal stopping problem. The transformation replaces the original payoff by the value of a generalized barrier option. We suggest a new Monte Carlo method to numerically calculate the option value also for multidimensional Markov processes. Because of presence of stopping time constraints the classical Longstaff-Schwartz least-square Monte Carlo algorithm or its extension introduced in [7] cannot be directly applied. We adapt the Longstaff-Schwartz algorithm to solve the stochastic Cauchy-Dirichlet problem related to the valuation problem of the barrier option along a set of simulated trajectories of the underlying Markov process. |
| Free access at | Official URL |
| Official URL | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=798124 |
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