A new approach to pricing American-style derivatives

Author

Laprise, Scott B. ; Fu, Michael C. ; Marcus, Steven I. ; Lim, Andrew E B

Author_Institution

Dept. of Math., Maryland Univ., College Park, MD, USA

Volume

1

fYear

2001

fDate

2001

Firstpage

329

Abstract

This paper presents a new approach to pricing American-style derivatives. By approximating the value function with a piecewise linear interpolation function, the option holder´s continuation value can be expressed as a summation of European call option values. Thus the pricing of an American option written on a single underlying asset can be converted to the pricing of a series of European call options. We provide two examples of American-style options where this approximation technique yields both upper and lower bounds on the true option price

Keywords

costing; interpolation; piecewise linear techniques; securities trading; American-style derivative pricing; European call option value summation; lower bounds; option holder continuation value; piecewise linear interpolation function; single underlying asset; true option price; upper bounds; value function; Dynamic programming; Educational institutions; Equations; Industrial engineering; Interpolation; Mathematics; Operations research; Piecewise linear approximation; Piecewise linear techniques; Pricing;

fLanguage

English

Publisher

ieee

Conference_Titel

Simulation Conference, 2001. Proceedings of the Winter

Conference_Location

Arlington, VA

Print_ISBN

0-7803-7307-3

Type

conf

DOI

10.1109/WSC.2001.977296

Filename

977296