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Pricing And Hedging American Options: A Recursive Integration Method

In: Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar

Author

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  • JING-ZHI HUANG

    (Stern School of Business, Finance Department, New York University, 44 West 4th Street, Suite 9-190, New York, NY 10012, USA and Goldman, Sachs & Co., 85, Brood Street, New York, NY 10004, USA)

  • MARTI G. SUBRAHMANYAM

    (Stern School of Business, Finance Department, New York University, 44 West 4th Street, Suite 9-190, New York, NY 10012, USA and Goldman, Sachs & Co., 85, Brood Street, New York, NY 10004, USA)

  • G. GEORGE YU

    (Stern School of Business, Finance Department, New York University, 44 West 4th Street, Suite 9-190, New York, NY 10012, USA and Goldman, Sachs & Co., 85, Brood Street, New York, NY 10004, USA)

Abstract

In this article, we present a new method for pricing and hedging American options along with an efficient implementation procedure. The proposed method is efficient and accurate in computing both option values and various option hedge parameters. We demonstrate the computational accuracy and efficiency of this numerical procedure in relation to other competing approaches. We also suggest how the method can be applied to the case of any American option for which a closed-form solution exists for the corresponding European option.

Suggested Citation

  • Jing-Zhi Huang & Marti G. Subrahmanyam & G. George Yu, 1999. "Pricing And Hedging American Options: A Recursive Integration Method," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar, chapter 8, pages 219-239, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812812599_0008
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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