The randomized American option as a classical solution to the penalized problem (Q898213)

Summary: We connect the exercisability randomized American option to the penalty method by showing that the randomized American option value \(u\) is the unique classical solution to the Cauchy problem corresponding to the canonical penalty problem for American options. We also establish a uniform bound for \(Au\), where \(A\) is the infinitesimal generator of a geometric Brownian motion.