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Application of Compound Options in the Evaluation of American Puts

Author

Listed:
  • José Ferreira Marinho Junior

    (Instituto de Matemática, Universidade Federal do Rio de Janeiro (UFRJ))

  • Mauro Antonio Rincon

    (Instituto de Matemática, Universidade Federal do Rio de Janeiro (UFRJ))

Abstract

In this article, a numerical method is developed to determine the value of a put, based in the solution of Black and Scholes (1973) for European option and on Richardson extrapolation that calculates the limit of an options sequence, whose time intervals tend to zero. In the beginning of the 70s, Black and Scholes (1973) and Merton (1973) they had developed partial differential equation, whose solution it determines the value of an European option. The boundary condition will go to determine the type of option (purchase or sale). Values for the put are calculated, priced and compared with methods of the numerical integration and the binomial approach.

Suggested Citation

  • José Ferreira Marinho Junior & Mauro Antonio Rincon, 2006. "Application of Compound Options in the Evaluation of American Puts," Brazilian Review of Finance, Brazilian Society of Finance, vol. 4(2), pages 169-179.
    • Handle: RePEc:brf:journl:v:4:y:2006:i:2:p:169-179
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    More about this item

    Keywords

    Risk Management; Financial Markets; Numerical Methods;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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