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Floating exercise boundaries for American options in time-inhomogeneous models

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  • Andrey Itkin
  • Yerkin Kitapbayev

Abstract

This paper examines a semi-analytical approach for pricing American options in time-inhomogeneous models characterized by negative interest rates (for equity, FX) or negative convenience yields (for commodities, cryptocurrencies). Under such conditions, exercise boundaries may exhibit a "floating" structure - dynamically appearing and disappearing. For example, a second exercise boundary could emerge within the computational domain and subsequently both could collapse, demanding specialized pricing methodologies.

Suggested Citation

  • Andrey Itkin & Yerkin Kitapbayev, 2025. "Floating exercise boundaries for American options in time-inhomogeneous models," Papers 2502.00740, arXiv.org.
    • Handle: RePEc:arx:papers:2502.00740
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    References listed on IDEAS

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    1. Andrey Itkin & Alexander Lipton & Dmitry Muravey, 2021. "Generalized Integral Transforms in Mathematical Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 12147.
    2. Peter Carr & Andrey Itkin & Dmitry Muravey, 2020. "Semi-closed form prices of barrier options in the time-dependent CEV and CIR models," Papers 2005.05459, arXiv.org.
    3. Andrey Itkin & Dmitry Muravey, 2020. "Semi-closed form prices of barrier options in the Hull-White model," Papers 2004.09591, arXiv.org, revised Sep 2020.
    4. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
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