A variation of the Canadisation algorithm for the pricing of American options driven by Lévy processes
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Abstract: We introduce an algorithm for the pricing of finite expiry American options driven by L'evy processes. The idea is to tweak Carr's `Canadisation' method, cf. Carr [9] (see also Bouchard et al [5]), in such a way that the adjusted algorithm is viable for any L'evy process whose law at an independent, exponentially distributed time consists of a (possibly infinite) mixture of exponentials. This includes Brownian motion plus (hyper)exponential jumps, but also the recently introduced rich class of so-called meromorphic L'evy processes, cf. Kyprianou et al [16]. This class contains all L'evy processes whose L'evy measure is an infinite mixture of exponentials which can generate both finite and infinite jump activity. L'evy processes well known in mathematical finance can in a straightforward way be obtained as a limit of meromorphic L'evy processes. We work out the algorithm in detail for the classic example of the American put, and we illustrate the results with some numerics.
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