Alternative characterizations of American put options

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

doi:10.1142/9789812819222_0005

Alternative characterizations of American put options

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

Finance and Risk Engineering

Research output: Chapter in Book/Report/Conference proceeding › Chapter

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)
Title of host publication	Financial Derivatives Pricing
Publisher	World Scientific Publishing Co.
Pages	85-103
Number of pages	19
ISBN (Electronic)	9789812819222
ISBN (Print)	9812819207, 9789812819208
DOIs	https://doi.org/10.1142/9789812819222_0005
State	Published - Jan 1 2008

Keywords

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

ASJC Scopus subject areas

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

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10.1142/9789812819222_0005

Cite this

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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.",

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author = "Carr, {Peter P.} and Jarrow, {Robert A.} 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.

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KW - European put options

KW - Free boundary-problem

KW - Local time

KW - Optimal stopping problem

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BT - Financial Derivatives Pricing

PB - World Scientific Publishing Co.

ER -

Alternative characterizations of American put options

Abstract

Keywords

ASJC Scopus subject areas

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