BFS 2002

Poster Presentation

Discrete and continuous time approximations of the optimal exercise boundary of American options

Antonella Basso, Martina Nardon, Paolo Pianca

The valuation of American-style options gives rise to an optimal stopping problem involving the computation of a time dependent exercise boundary over the whole life of the contract. An exact computational formula for this time dependent optimal boundary is not known. Nevertheless, in the literature some numerical approaches can be proposed to approximate the optimal boundary.
In particular, in this contribution we study three different numerical techniques: an improved lattice method, a randomization approach based on the American option valuation procedure proposed by Carr and an analytic approximation procedure proposed by Bunch and Johnson.
The three techniques studied are tested and compared through a wide empirical analysis.