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August 2003 The valuation of American call options on the minimum of two dividend-paying assets
Jerome Detemple, Shui Feng, Weidong Tian
Ann. Appl. Probab. 13(3): 953-983 (August 2003). DOI: 10.1214/aoap/1060202832

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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Jerome Detemple. Shui Feng. Weidong Tian. "The valuation of American call options on the minimum of two dividend-paying assets." Ann. Appl. Probab. 13 (3) 953 - 983, August 2003. https://doi.org/10.1214/aoap/1060202832

Information

Published: August 2003
First available in Project Euclid: 6 August 2003

zbMATH: 1091.91034
MathSciNet: MR1994042
Digital Object Identifier: 10.1214/aoap/1060202832

Subjects:
Primary: 91B28
Secondary: 60G40, 62L15

Rights: Copyright © 2003 Institute of Mathematical Statistics

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Vol.13 • No. 3 • August 2003
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