Author(s): Ghada Alobaidi | Roland Mallier
Journal: Journal of Applied Mathematics
ISSN 1110-757X
Volume: 1;
Issue: 1;
Start page: 39;
Date: 2001;
Original page
ABSTRACT
An American put option is a derivative financial instrument that gives its holder the right but not the obligation to sell an underlying security at a pre-determined price. American options may be exercised at any time prior to expiry at the discretion of the holder, and the decision as to whether or not to exercise leads to a free boundary problem. In this paper, we examine the behavior of the free boundary close to expiry. Working directly with the underlying PDE, by using asymptotic expansions, we are able to deduce this behavior of the boundary in this limit.
Journal: Journal of Applied Mathematics
ISSN 1110-757X
Volume: 1;
Issue: 1;
Start page: 39;
Date: 2001;
Original page
ABSTRACT
An American put option is a derivative financial instrument that gives its holder the right but not the obligation to sell an underlying security at a pre-determined price. American options may be exercised at any time prior to expiry at the discretion of the holder, and the decision as to whether or not to exercise leads to a free boundary problem. In this paper, we examine the behavior of the free boundary close to expiry. Working directly with the underlying PDE, by using asymptotic expansions, we are able to deduce this behavior of the boundary in this limit.
