On the methods of pricing American options: case study

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Date

2018

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Springer

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Mathematics
(2000)
The Atılım University Department of Mathematics was founded in 2000 and it offers education in English. The Department offers students the opportunity to obtain a certificate in Mathematical Finance or Cryptography, aside from their undergraduate diploma. Our students may obtain a diploma secondary to their diploma in Mathematics with the Double-Major Program; as well as a certificate in their minor alongside their diploma in Mathematics through the Minor Program. Our graduates may pursue a career in academics at universities, as well as be hired in sectors such as finance, education, banking, and informatics. Our Department has been accredited by the evaluation and accreditation organization FEDEK for a duration of 5 years (until September 30th, 2025), the maximum FEDEK accreditation period achievable. Our Department is globally and nationally among the leading Mathematics departments with a program that suits international standards and a qualified academic staff; even more so for the last five years with our rankings in the field rankings of URAP, THE, USNEWS and WEBOFMETRIC.

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Abstract

In this study, a comparative analysis of numerical and approximation methods for pricing American options is performed. Binomial and finite difference approximations are discussed; furthermore, Roll-Geske-Whaley, Barone-Adesi and Whaley and Bjerksund-Stensland analytical approximations as well as the least-squares Monte Carlo method of Longstaff and Schwartz are presented. Applicability and efficiency in almost all circumstances, numerical solutions of the corresponding free boundary problem is emphasized. Methods used in pricing American options are also compared on dividend and non-dividend paying assets; and their pros and cons are discussed along with numerical experiments.

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Uğur, Ömür/0000-0001-9348-7775; Aksoy, Umit/0000-0002-6014-1898; Aydogan, Burcu/0000-0002-9462-621X
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Uğur, Ömür ORCID logo
Aksoy, Umit ORCID logo
Aydogan, Burcu ORCID logo

Keywords

American options, Numerical methods, Analytical approximations, Bounds

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55th Meeting of EURO-Working-Group on Commodities and Ficial Modelling (EWGCFM) -- MAY 14-16, 2015 -- METU, Ankara, TURKEY

Volume

260

Issue

1-2

Start Page

79

End Page

94

URI

https://doi.org/10.1007/s10479-016-2267-4
 https://hdl.handle.net/20.500.14411/2999

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