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Approximate pricing of American exchange options with jumps

Author

Listed:
  • Guanghua Lian
  • Robert J. Elliott
  • Petko Kalev
  • Zhaojun Yang

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.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:6:p:983-1001
    DOI: 10.1002/fut.22316
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