Are American options European after all?

DOI10.1214/21-AAP1698MaRDI QIDQ2134285zbMATH OpenOpenAlexFDO

Authors Yanyan Li

Publication date 6 May 2022

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2002.05571

zbMATH Keywords

dualityfree boundary problemoptimal stoppingcheapest dominating European optionembedded American optionrepresentable American option

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40)

Abstract: We call a given American option representable if there exists a European claim which dominates the American payoff at any time and such that the values of the two options coincide in the continuation region of the American option. This concept has interesting implications from a probabilistic, analytic, financial, and numeric point of view. Relying on methods from Jourdain and Martini (2001, 2002), Chrsitensen (2014) and convex duality, we make a first step towards verifying representability of American options.

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Cited in

(2)

• A new integral equation for Brownian stopping problems with finite time horizon
• American prices embedded in European prices

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