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Alternative Characterizations Of American Put Options

In: Financial Derivatives Pricing Selected Works of Robert Jarrow

Author

Listed:
  • PETER CARR

    (Johnson Graduate School of Management, Cornell University, Ithaca, NY, USA)

  • ROBERT JARROW

    (Johnson Graduate School of Management, Cornell University, Ithaca, NY, USA)

  • RAVI MYNENI

    (Graduate School of Business, Stanford University, Stanford, CA, USA)

Abstract
We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation.

Suggested Citation

  • Peter Carr & Robert Jarrow & Ravi Myneni, 2008. "Alternative Characterizations Of American Put Options," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 5, pages 85-103, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812819222_0005
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    Keywords

    Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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