Title :
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
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;
Conference_Titel :
Simulation Conference, 2001. Proceedings of the Winter
Conference_Location :
Arlington, VA
Print_ISBN :
0-7803-7307-3
DOI :
10.1109/WSC.2001.977296