Error Estimates for Binomial Approximations of Game Put Options. (30th January 2014)

• Record Type: Journal Article
• Authors: Iron, Yonatan; Kifer, Yuri
• Other Names: Jorgensen P. E. Academic Editor.; Montero M. Academic Editor.
• Is Part Of: ISRN probability and statistics. Volume 2014(2014)
• Publication Date: 2014-01-30
• Subjects: Probabilities -- Periodicals; Mathematical statistics -- Periodicals; Mathematical statistics; Probabilities; Electronic journals; Periodicals; 519
• DOI: 10.1155/2014/743030
• Languages: English
• ISSNs: 2090-4711

Abstract

Abstract : A game or Israeli option is an American style option where both the writer and the holder have the right to terminate the contract before the expiration time. Kifer (2000) shows that the fair price for this option can be expressed as the value of a Dynkin game. In general, there are no explicit formulas for fair prices of American and game options and approximations are used for their computations. The paper by Lamberton (1998) provides error estimates for binomial approximation of American put options and here we extend the approach of Lamberton (1998) in order to obtain error estimates for binomial approximations of game put options which is more complicated as it requires us to deal with two free boundaries corresponding to the writer and to the holder of the game option.