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Pricing American exchange options in a jump‐diffusion model
Author(s) -
Lindset Snorre
Publication year - 2007
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20247
Subject(s) - jump diffusion , valuation of options , richardson extrapolation , finite difference methods for option pricing , monte carlo methods for option pricing , extrapolation , value (mathematics) , economics , jump , option value , binomial options pricing model , asian option , diffusion , binary option , mathematical economics , moneyness , econometrics , mathematics , black–scholes model , microeconomics , statistics , volatility (finance) , physics , quantum mechanics , thermodynamics , incentive
A way to estimate the value of an American exchange option when the underlying assets follow jump‐diffusion processes is presented. The estimate is based on combining a European exchange option and a Bermudan exchange option with two exercise dates by using Richardson extrapolation as proposed by R. Geske and H. Johnson (1984). Closed‐form solutions for the values of European and Bermudan exchange options are derived. Several numerical examples are presented, illustrating that the early exercise feature may have a significant economic value. The results presented should have potential for pricing over‐the‐counter options and in particular for pricing real options. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:257–273, 2007