An integral equation representation for American better-of option on two underlying assets View Full Text


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Article Info

DATE

2022-05-12

AUTHORS

Junkee Jeon, Geonwoo Kim

ABSTRACT

In this paper, we study the problem for pricing of American better-of option on two assets. Due to two correlated underlying assets and early-exercise feature which requires two free boundaries to be determined for the option price, this problem is a complex. We propose a new and efficient approach to solve this problem. Mellin transform methods are mainly used to find the pricing formula, and explicit formula for the option price is derived as an integral equation representation. The formula has two free boundaries which are represented by the coupled integral equations. We propose the numerical scheme based on recursive integration method to implement the integral equations and show that our approach with the proposed numerical scheme is accurate and efficient in computing the prices. In addition, we illustrate significant movements on the option prices and two free boundaries with respect to the selected parameters. More... »

PAGES

39

References to SciGraph publications

  • 2009-08-18. Exchange option pricing under stochastic volatility: a correlation expansion in REVIEW OF DERIVATIVES RESEARCH
  • 2017-08-30. A Hybrid Monte Carlo and Finite Difference Method for Option Pricing in COMPUTATIONAL ECONOMICS
  • 2019-02-20. A HODIE finite difference scheme for pricing American options in ADVANCES IN CONTINUOUS AND DISCRETE MODELS
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    http://scigraph.springernature.com/pub.10.1186/s13662-022-03713-9

    DOI

    http://dx.doi.org/10.1186/s13662-022-03713-9

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