TY - JOUR

T1 - A closed-form analytic correction to the Black-Scholes-Merton price for perpetual American options

AU - Yoon, Ji Hun

AU - Kim, Jeong Hoon

PY - 2013/12

Y1 - 2013/12

N2 - 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.

AB - 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.

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U2 - 10.1016/j.aml.2013.06.012

DO - 10.1016/j.aml.2013.06.012

M3 - Article

AN - SCOPUS:84883453611

VL - 26

SP - 1146

EP - 1150

JO - Applied Mathematics Letters

JF - Applied Mathematics Letters

SN - 0893-9659

IS - 12

ER -