Abstract
American options valuation leads to solve an optimal stopping problem or a variational inequality. These two approaches involve the knowledge of a free boundary, boundary of the so-called exercise region. As we are not able to get a closed formula for the American option value function, we will approximate the free boundary by this of a Bermudean option. Indeed a Bermudean option value function is the solution of an optimal stopping problem which can be viewed as a free boundary problem. Thanks to a maximum principle, we evaluate the difference between Bermudean and American boundaries.
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© 2006 Birkhäuser Verlag Basel/Switzerland
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Chevalier, E. (2006). Bermudean Approximation of the Free Boundary Associated with an American Option. In: Figueiredo, I.N., Rodrigues, J.F., Santos, L. (eds) Free Boundary Problems. International Series of Numerical Mathematics, vol 154. Birkhäuser, Basel. https://doi.org/10.1007/978-3-7643-7719-9_14
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DOI: https://doi.org/10.1007/978-3-7643-7719-9_14
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