A new approach to pricing American-style derivatives

Authors:
Scott B. Laprise;Michael C. Fu;Steven I. Marcus;Andrew E. B. Lim
Affiliations:
University of Maryland, College Park, MD;University of Maryland, College Park, MD;University of Maryland, College Park, MD;Columbia University, New York, NY
Venue:
Proceedings of the 33nd conference on Winter simulation
Year:
2001

Citing 1
Cited 1

Regression methods for pricing complex American-style options

IEEE Transactions on Neural Networks

Pricing American-Style Derivatives with European Call Options

Management Science

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Abstract

This paper presents a new approach to pricing American-style derivatives. By approximating the value function with a piecewise linear interpolation function, the option holder's continuation value can be expressed as a summation of European call option values. Thus the pricing of an American option written on a single underlying asset can be converted to the pricing of a series of European call options. We provide two examples of American-style options where this approximation technique yields both upper and lower bounds on the true option price.