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ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS
Author(s) -
Carr Peter,
Jarrow Robert,
Myneni Ravi
Publication year - 1992
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.1992.tb00040.x
Subject(s) - equivalence (formal languages) , value (mathematics) , representation (politics) , mathematical economics , economics , price equation , call option , mathematics , econometrics , statistics , pure mathematics , political science , politics , law
We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation.