Approximate pricing of American exchange options with jumps. Issue 6 (16th February 2022)

• Record Type: Journal Article
• Authors: Lian, Guanghua; Elliott, Robert J.; Kalev, Petko; Yang, Zhaojun
• Is Part Of: Journal of futures markets. Volume 42:Issue 6(2022)
• Page Start: 983
• Page End: 1001
• Publication Date: 2022-02-16
• Subjects: American options -- exchange options -- jump diffusion -- option pricing; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22316
• Languages: English
• ISSNs: 0270-7314

Abstract

Abstract: This paper presents a numerical method to price American exchange options based on jump‐diffusion processes. We first derive a closed‐form expression for the value of European exchange options, then decompose the value function of an American exchange option into a European counterpart, and an early exercise premium that is derived analytically. The early exercise boundary for an American exchange option approximately satisfies an algebraic equation that can be quickly numerically solved. Consequently, a formula is obtained for efficiently pricing American exchange options. The numerical results reveal that our pricing formula is robust and accurate.