ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS

Peter Carr; Robert Jarrow; Ravi Myneni

doi:10.1111/j.1467-9965.1992.tb00040.x

ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS

Peter Carr, Robert Jarrow, Ravi Myneni

Finance and Risk Engineering

Research output: Contribution to journal › Article › peer-review

Abstract

We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation.

Original language	English (US)
Pages (from-to)	87-106
Number of pages	20
Journal	Mathematical Finance
Volume	2
Issue number	2
DOIs	https://doi.org/10.1111/j.1467-9965.1992.tb00040.x
State	Published - Apr 1992

Keywords

American put options
European put options
free boundary‐problem
local time
optimal stopping problem

ASJC Scopus subject areas

Accounting
Finance
Social Sciences (miscellaneous)
Economics and Econometrics
Applied Mathematics

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10.1111/j.1467-9965.1992.tb00040.x

Cite this

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author = "Peter Carr and Robert Jarrow and Ravi Myneni",

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N2 - We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation.

AB - We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation.

KW - American put options

KW - European put options

KW - free boundary‐problem

KW - local time

KW - optimal stopping problem

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ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS

Abstract

Keywords

ASJC Scopus subject areas

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