TY - JOUR
T1 - The Free Boundary for the American Put Option
JF - The Journal of Derivatives
SP - 9
LP - 21
DO - 10.3905/jod.2020.1.114
VL - 28
IS - 2
AU - Little, Thomas
Y1 - 2020/11/30
UR - http://jod.pm-research.com/content/28/2/9.abstract
N2 - The free boundary of the American put option is analytically characterized via new and exact formulae. New, accurate short-time asymptotics are an immediate corollary of these analytical results. The free boundary is also represented formulaically throughout all tenors by a simple two-parameter generalized Gaussian functional form.TOPICS: Options, fundamental equity analysis, statistical methodsKey Findings• First exact formula for the free boundary (early exercise boundary) of the American put option in terms of the exogenous inputs: risk-free rate, volatility, and a boundary dependent integral.• A simple and accurate asymptotics formula for the free boundary of the American put option near expiration.• An empirical solution (possibly exact) of the free boundary as a two-parameter generalized Gaussian functional form.
ER -