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Volume 7,     Number 4,     Winter 1999

 

THE EARLY EXERCISE BOUNDARY FOR
THE AMERICAN PUT NEAR EXPIRY:
NUMERICAL APPROXIMATION
ROBERT STAMICAR, DANIEL ŠEVČOVIČ
AND JOHN CHADAM

Abstract. It is well known [11] that the early exercise boundary for the American put approaches the strike price at expiry with infinite velocity. This causes difficulties in developing efficient and accurate numerical procedures and consequently trading strategies, during the volatile period near expiry. Based on the work of D. Ševčovič[10] for the American call with dividend, an integral equation is derived for the free boundary for the American put which leads to an accurate numerical procedure and an interesting, and accurate, asymptotic solution for the early exercise boundary near expiry.

 

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