An improved method for pricing and hedging long dated American options
| Autor: | Tommaso Paletta, Radu Tunaru, Frank J. Fabozzi, Silvia Stanescu |
|---|---|
| Jazyk: | angličtina |
| Rok vydání: | 2016 |
| Předmět: |
Mathematical optimization
Information Systems and Management General Computer Science 0211 other engineering and technologies Improved method 02 engineering and technology Management Science and Operations Research HG Industrial and Manufacturing Engineering HA33 QA273 0502 economics and business Economics Exercise price 050208 finance 021103 operations research Monte Carlo methods for option pricing 05 social sciences Maturity (finance) Range (mathematics) Modeling and Simulation HG0101 Binomial options pricing model Rational pricing HG0106 LEAPS |
| ISSN: | 0377-2217 |
| Popis: | The majority of quasi-analytic pricing methods for American options are efficient near maturity but are prone to larger errors when time-to-maturity increases. We introduce a new methodology to increase the accuracy of almost any existing quasi-analytic approach in pricing long-maturity American options. The new methodology, called the “extension-method”, relies on an approximation of the optimal exercise price near the beginning of the contract combined with existing pricing approaches so that the maturity range for which small errors are attainable is extended. Our method retains the quasi-analytic nature of the methods it improves. Generic quasi-analytic formulae for the price of an American put as well as for its hedging parameter are derived. Our scenarios-based numerical study indicates that our method considerably improves both the pricing and the hedging performance of a number of established approaches for a wide range of maturities. The superiority of this approach is illustrated with real financial data by considering S&P 100 TM LEAPS ® options traded from January 2008 to May 2015. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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