Mathematics Colloquium: A new integral equation formulation for American put options

2018-09-26

4:10pm Neill Hall 5W

Song-Ping Zhu

In this talk, a completely new integral equation for the price of an American put option as well as its optimal exercise price is presented. Compared to existing integral equations for pricing American options, the new integral formulation has two distinguishable advantages; i) it is in a form of one-dimensional integral, and ii) it is in a form that is free from any discontinuity and singularities associated with the optimal exercise boundary at the expiry time. These rather unique features have led to a significant enhancement of the computational accuracy and efficiency as shown through some examples.