Abstract
AbstractIn the paper, we solve the pricing problem for American put‐like options in Markov‐modulated Lévy models. The early exercise boundaries and prices are calculated using a generalization of Carr's randomization for regime‐switching models. An efficient iteration pricing procedure is developed. The computational time is of order m2, where m is the number of states, and of order m, if the parallel computations are allowed. The payoffs, riskless rates and class of Lévy processes may depend on a state. Special cases are stochastic volatility models and models with stochastic interest rate; both must be modelled as finite‐state Markov chains. (© 2008 WILEY‐VCH Verlag GmbH & Co. KGaA, Weinheim)
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