CONVEXITY OF THE EXERCISE BOUNDARY OF THE AMERICAN PUT OPTION ON A ZERO DIVIDEND ASSET

Authors: Chen, Xinfu¹; Chadam, John¹; Jiang, Lishang²; Zheng, Weian³

Source: Mathematical Finance, Volume 18, Number 1, January 2008 , pp. 185-197(13)

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Abstract:

We show that the optimal exercise boundary for the American put option with non-dividend-paying asset is convex. With this convexity result, we then give a simple rigorous argument providing an accurate asymptotic behavior for the exercise boundary near expiry.

Keywords: American put option on a zero dividend asset; convexity of the early exercise boundary; free boundary problem; obstacle problem; near-expiry estimates

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-9965.2007.00328.x

Affiliations: 1: University of Pittsburgh 2: Tongji University 3: University of California, Irvine

Publication date: 2008-01-01