An alternative approach to the valuation of American options and applications |
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Authors: | In Joon Kim G George Yu |
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Institution: | (1) Department of Industrial Management, Korea Advanced Institute of Science and Technology, 373-1, Kusong-Dong, Yusong-Gu, 305-701 Taejon, Republic of Korea;(2) Goldman Sachs (Asia) L.L.C., 37th Floor Asia Pacific Finance Tower, Citybank Plaza, Hong Kong |
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Abstract: | In this paper we examine the structure of American option valuation problems and derive the analytic valuation formulas under general underlying security price processes by an alternative but intuitive method. For alternative diffusion processes, we derive closed-form analytic valuation formulas and analyze the implications of asset price dynamics on the early exercise premiums of American options. In this regard, we introduce useful and interesting diffusion processes into American option-pricing literature, thus providing a wide range of choices of pricing models for various American-type derivative assets. This work offers a useful analytic framework for empirical testing and practical applications such as the valuation of corporate securities and examining the impact of options trading on market micro-structure. |
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