Title

A simple approximation formula for calculating the optimal exercise boundary of American puts

RIS ID

38304

Publication Details

Zhu, S. (2011). A simple approximation formula for calculating the optimal exercise boundary of American puts. Journal of Applied Mathematics and Computing, 37 (1-2), 611-623.

Abstract

In this paper, a simple algorithm to improve the computational accuracy of the analytical approximation for the value of American put option and their optimal exercise boundary is presented. In the current approach, Zhu's simple approximation formula is used as an initial guess for the optimal exercise boundary of American put options. The determination of an improved optimal exercise boundary is then achieved by setting a null value of the Theta of option on the optimal exercise boundary. Numerical test results show that the improvement in accuracy is indeed significant in determining the optimal exercise boundary.

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Link to publisher version (DOI)

http://dx.doi.org/10.1007/s12190-010-0454-z