ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS |
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| Authors: | Peter Carr Robert Jarrow Ravi Myneni |
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| Institution: | Johnson Graduate School of Management, Cornell University, Ithaca, NY;Graduate School of Business, Stanford University, Stanford, CA |
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| Abstract: | We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation. |
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| Keywords: | American put options European put options local time free boundary-problem optimal stopping problem |
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