A closed-form analytic correction to the Black-Scholes-Merton price for perpetual American options

Ji Hun Yoon, Jeong Hoon Kim

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

This is a complementary study of a recent work by Yoon et al. (2013) [1] [J.-H. Yoon, J.-H. Kim, S.-Y. Choi, Multiscale analysis of a perpetual American option with the stochastic elasticity of variance, Appl. Math. Lett. 26 (7) (2013)] which excludes a certain level of the elasticity of variance. A second-order correction to the Black-Scholes option price and optimal exercise boundary for a perpetual American put option is made under the stochastic elasticity of variance of a risky asset. Contrary to the case of Yoon et al. (2013) [1], it is given by an explicit closed-form analytic expression so that one can access clearly the sensitivity of the option price and the optimal exercise boundary to changes in model parameters as well as the impact of the presence of a stochastic elasticity term on the option price and the optimal time to exercise.

Original languageEnglish
Pages (from-to)1146-1150
Number of pages5
JournalApplied Mathematics Letters
Volume26
Issue number12
DOIs
Publication statusPublished - 2013 Dec 1

    Fingerprint

All Science Journal Classification (ASJC) codes

  • Applied Mathematics

Cite this