| Author: | Detemple, J. Tian, W. |
| Title: | The Valuation of American Options for a Class of Diffusion Processes |
| Journal: | Management Science
2002 : JUL, VOL. 48:7, p. 917-937 |
| Index terms: | OPTIONS VALUATION INTEREST RATES VOLATILITY |
| Language: | eng |
| Abstract: | The authors present an integral equation approach for the valuation of American-style derivatives when the underlying asset price follows a general diffusion process and the interest rate is stochastic. The authors' contribution is fourfold. First, the authors show that the exercise region is determined by a single exercise boundary under very general conditions on the interest rate and the dividend yield. Second, based on this result, the authors derive a recursive integral equation for the exercise boundary and provide a parametric representation of the American option price. Third, the authors apply the results to models with stochastic volatility or stochastic interest rate, and to American bond options in one-factor models. For the cases studied, explicit parametric valuation formulas are obtained. |
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