The valuation of American call options on the minimum of two dividend-paying assets
Jerome Detemple, Shui Feng, and Weidong Tian
Source: Ann. Appl. Probab. Volume 13, Number 3
(2003), 953-983.
Abstract
This paper examines the valuation of call options on the minimum of two dividend-paying assets. We show that the optimal exercise boundary consists of three components, two continuous curves and one component along the diagonal with empty interior. The option price is shown to satisfy the early exercise premium representation in which the gains from exercise involve the local time of the minimum of the two underlying asset prices. A system of recursive integral equations for the exercise boundary components is derived. Using a class of simple stopping times we also construct lower and upper bounds for the American call min-option price: these are easy to compute and can be employed to design efficient approximations of the contract value.
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Keywords: Option valuation; calls; American-style; minimum of two assets; dividends; exercise premium; local time; lower and upper bounds; numerical computation
Full-text: Open access
Links and Identifiers
Permanent link to this document: http://projecteuclid.org/euclid.aoap/1060202832
Digital Object Identifier: doi:10.1214/aoap/1060202832
Mathematical Reviews number (MathSciNet): MR1994042
Zentralblatt MATH identifier: 02061207
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