Alternative characterizations of American put options

Peter P. Carr, Robert A. Jarrow, Ravi Myneni

Research output: Chapter in Book/Report/Conference proceedingChapter

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 languageEnglish (US)
Title of host publicationFinancial Derivatives Pricing
PublisherWorld Scientific Publishing Co.
Pages85-103
Number of pages19
ISBN (Electronic)9789812819222
ISBN (Print)9812819207, 9789812819208
DOIs
StatePublished - Jan 1 2008

Keywords

  • American put options
  • European put options
  • Free boundary-problem
  • Local time
  • Optimal stopping problem

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics, Econometrics and Finance(all)
  • Mathematics(all)

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