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Pricing American exchange options in a jump‐diffusion model

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  • Snorre Lindset

Abstract

A way to estimate the value of an American exchange option when the underlying assets follow jump‐diffusion processes is presented. The estimate is based on combining a European exchange option and a Bermudan exchange option with two exercise dates by using Richardson extrapolation as proposed by R. Geske and H. Johnson (1984). Closed‐form solutions for the values of European and Bermudan exchange options are derived. Several numerical examples are presented, illustrating that the early exercise feature may have a significant economic value. The results presented should have potential for pricing over‐the‐counter options and in particular for pricing real options. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:257–273, 2007

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  • Snorre Lindset, 2007. "Pricing American exchange options in a jump‐diffusion model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(3), pages 257-273, March.
    • Handle: RePEc:wly:jfutmk:v:27:y:2007:i:3:p:257-273
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    Cited by:

    1. Lian, Yu-Min & Chen, Jun-Home & Liao, Szu-Lang, 2021. "Cojump risks and their impacts on option pricing," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 399-410.
    2. Lian, Yu-Min & Chen, Jun-Home, 2020. "Joint dynamic modeling and option pricing in incomplete derivative-security market," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    3. Rainer Andergassen & Luigi Sereno, 2012. "Valuation of N-stage Investments Under Jump-Diffusion Processes," Computational Economics, Springer;Society for Computational Economics, vol. 39(3), pages 289-313, March.
    4. Barbedo, Claudio Henrique da Silveira & Lemgruber, Eduardo Facó, 2009. "A down-and-out exchange option model with jumps to evaluate firms' default probabilities in Brazil," Emerging Markets Review, Elsevier, vol. 10(3), pages 179-190, September.
    5. Guanghua Lian & Robert J. Elliott & Petko Kalev & Zhaojun Yang, 2022. "Approximate pricing of American exchange options with jumps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(6), pages 983-1001, June.

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