Valuing American options under the CEV model by Laplace-Carson transforms

Authors:
Hoi Ying Wong;Jing Zhao
Affiliations:
Department of Statistics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, China;School of Economics and Finance, La Trobe University, Bundoora, VIC 3086, Australia
Venue:
Operations Research Letters
Year:
2010

Citing 5
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Abstract

This paper investigates American option pricing under the constant elasticity of variance (CEV) model. Taking the Laplace-Carson transform (LCT) to the corresponding free-boundary problem enables the determination of the optimal early exercise boundary to be separated from the valuation procedure. Specifically, a functional equation for the LCT of the early exercise boundary is obtained. By applying Gaussian quadrature formulas, an efficient method is developed to compute the early exercise boundary, American option price and Greeks under the CEV model.