American prices embedded in European prices (Q5929646): Difference between revisions

The authors analyze, in a Black-Scholes framework, relations between American options prices and European options prices. They exhibit a large class of payoffs \(\psi\) for which the American option price \(v^{\text{am}}_\psi(t, x)= \sup_{\tau\in{\mathcal T}} (0; t)\) has a closed-form expression. The main theorem is Theorem 3. Let \(\widehat\varphi(x)= \inf_{t\geq 0} v_\varphi(t, x)\) where \(v_\varphi(t, x)\) is the European option price for a payoff \(\varphi\). Theorem 3 gives conditions on \(\widehat\varphi\) to insure that \(v^{\text{am}}_{\widehat\varphi}(t, x)= v_\varphi(t\vee\widehat t(x), x)\) where \(\widehat t\) has to verify \(v_\varphi(\widehat t(x), x)= \widehat\varphi(x)\). Examples verifying Theorem 3 hypotheses are given.