[KSCI] Korea Science Citation Index Service

http://dx.doi.org/10.12941/jksiam.2011.15.2.151

CLOSED-FORM SOLUTIONS OF AMERICAN PERPETUAL PUT OPTION UNDER A STRUCTURALLY CHANGING ASSET

Shin, Dong-Hoon (THE INSTITUTE OF BASIC SCIENCE, KOREA UNIVERSITY)

Publication Information

Journal of the Korean Society for Industrial and Applied Mathematics / v.15, no.2, 2011 , pp. 151-160 More about this Journal

Abstract

Typically, it is hard to find a closed form solution of option pricing formula under an asset governed by a change point process. In this paper we derive a closed-form solution of the valuation function for an American perpetual put option under an asset having a change point. Structural changes are formulated through a change-point process with a Markov chain. The modified smooth-fit technique is used to obtain the closed-form valuation function. We also guarantee the optimality of the solution via the proof of a corresponding verification theorem. Numerical examples are included to illustrate the results.

Keywords

option pricing; american perpetual options; change point process; structuaral changes; optimal stopping time;

Citations & Related Records

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