Evaluation of American strangles

This paper presents a generalisation of McKean's free boundary value problem for American options by considering an American strangle position, where exercising one side of the payoff early knocks-out the remaining side. The Fourier transform technique is used to derive a coupled integral equat...

Full description

Saved in:
Bibliographic Details
Published in:Journal of economic dynamics & control 2005, Vol.29 (1), p.31-62
Main Authors: Chiarella, Carl, Ziogas, Andrew
Format: Article
Language:English
Subjects:
Algorithms
American options
Comparative analysis
Coupled Volterra integral equation
Economic dynamics
Economic theory
Evaluation
Fourier transforms
Free-boundary problem
Incomplete Fourier transform
Studies
U.S.A
Value
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper presents a generalisation of McKean's free boundary value problem for American options by considering an American strangle position, where exercising one side of the payoff early knocks-out the remaining side. The Fourier transform technique is used to derive a coupled integral equation system for the strangle's free boundaries. A numerical algorithm is provided to solve this system, and these free boundaries are then used to determine the price of the American strangle position. Numerical comparisons between the strangle price and the price of a portfolio formed using a long American call and a long American put option are presented.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2003.04.010