Abstract
The valuation for an American continuous-installment put option on zero-coupon bond is considered by Kim's equations under a single factor model of the short-term interest rate, which follows the famous Vasicek model. In term of the price of this option, integral representations of both the optimal stopping and exercise boundaries are derived. A numerical method is used to approximate the optimal stopping and exercise boundaries by quadrature formulas. Numerical results and discussions are provided.
Highlights
There has been a large literature dealing with numerical methods for American options on stocks 1 and references cited therein, 2, there are not many papers for American options on default-free bonds, see, for example, 3–7, and so on
The aim of this paper is to present an approximation method for pricing American CI put option written on default-free, zero-coupon bond under Vasicek interest rate model
A simple approximated method for pricing the American CI option written on the zero-bond under Vasicek model is proposed
Summary
There has been a large literature dealing with numerical methods for American options on stocks 1 and references cited therein, 2 , there are not many papers for American options on default-free bonds, see, for example, 3–7 , and so on. Numerical methods such as finite differences, binomial tree methods and Least-Square Monte Carlo simulations are still widely used. The buyer can choose at any time to stop making installment payments by either exercising the option or stopping the option contract.
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