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On the American Option Value Near its Exercise Region

  • Etienne Chevalier
Conference paper
Part of the Mathematics in Industry book series (MATHINDUSTRY, volume 12)

American options valuation leads to solve an optimal stopping problem or a variational inequality. These two approaches involve the knowledge of a free boundary, boundary of the so-called exercise region. Numerical methods exist to solve this kind of problems but these methods are not very efficient in high dimension because some information on the free boundary is needed. To improve our knowledge of the value function near its exercise region, we give here a lower bound for the difference between the value function and the pay-off function near the free boundary. This result can be used, for instance, to get some estimation for the convergence rate of the Bermudean option exercise region to the American one.

Keywords

Convergence Rate Variational Inequality Free Boundary Option Price American Option 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2008

Authors and Affiliations

  • Etienne Chevalier
    • 1
  1. 1.Laboratoire d'Analyse et Probabilité, Boulevard François MitterrandUniversité d'Evry Val d'EssonneEvry CedexFrance

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