Abstract
The characteristics of the early exercise of American options are full of research implications, and it is interesting to define the premia for the early exercise of different American options. In this paper, the option value is calculated via the risk-neutral measure, which define the payoff of an option at a certain time period through a discrete model called binomial tree and then discount the payoff by risk-neutral method to determine the option value. This paper first considered the conditions for early exercise of American options at the nodes, and then find out the law of premiums by taking the slope of the premium function.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Cox, J.C., Ross, S.A., Rubinstein, M.: Option pricing: a simplified approach. J. Financ. Econ. 7(3), 229–263 (1979)
Ruf, J: Lecture notes for ‘Discrete-Time Models for the Pricing of Options’, September-November 2021
Ravi, M.: The pricing of the American option. Ann. Appl. Probab. 2(1), 1–23 (1992)
Sharpe, W.F.: Investments. Prentice-Hall, Englewood Chffs, NJ (1978)
Birge, J.R., Zhang, R.Q.: Risk-neutral option pricing methods for adjusting constrained cash flows. Eng. Econ. 44(1), 36–49 (1999)
Global Rate: East Money (2021). https://data.eastmoney.com/cjsj/globalRate.html
Acknowledgements
We are grateful to Professor Johannes Ruf from The London School of Economics and Political Science and our teaching assistant Yueying Sun who gave us a lot of suggestions and help on our research progress.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2022 The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.
About this paper
Cite this paper
Bai, X., Lin, H., Wang, Z. (2022). Discrete-Time Model Pricing of American Option Early Exercise Premia. In: Li, X., Yuan, C., Ganchev, I. (eds) Proceedings of the 2022 International Conference on Business and Policy Studies. CONF-BPS 2022. Applied Economics and Policy Studies. Springer, Singapore. https://doi.org/10.1007/978-981-19-5727-7_67
Download citation
DOI: https://doi.org/10.1007/978-981-19-5727-7_67
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-19-5726-0
Online ISBN: 978-981-19-5727-7
eBook Packages: Economics and FinanceEconomics and Finance (R0)