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APPROXIMATE SOLUTIONS FOR THE BRITISH PUT OPTION AND ITS OPTIMAL EXERCISE BOUNDARY

Part of: Mathematical finance

Published online by Cambridge University Press:  22 January 2016

JOANNA GOARD
JOANNA GOARD*
Affiliation:
School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW 2522, Australia email [email protected]
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Abstract

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British put options are financial derivatives with an early exercise feature whereby on payoff, the holder receives the best prediction of the European put payoff under the hypothesis that the true drift of the stock price is equal to a contract drift. In this paper, we derive simple analytic approximations for the optimal exercise boundary and the option valuation, valid for short expiry times – which is a common feature of most options traded in the market. Empirical results show that the approximations provide accurate results for expiries of at least up to two months.

Keywords

British optionsfree boundary problemsanalytic approximations

MSC classification

Primary: 91G20: Derivative securities
Type
Research Article
Information
The ANZIAM Journal , Volume 57 , Issue 3 , January 2016 , pp. 222 - 243
Copyright
© 2016 Australian Mathematical Society 

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