A new approach to pricing American-style derivatives

This paper presents a new approach to pricing Americanstyle derivatives. By approximating the value function with a piecewise linear interpolation function, the option holder's continuation value can be expressed as a summation of European call option values. Thus the pricing of an American option written on a single underlying asset can be converted to the pricing of a series of European call options. We provide two examples of American-style options where this approximation technique yields both upper and lower bounds on the true option price.

• Type: Conference
• Year: 2001
• Where: WSC
• Authors: Scott B. Laprise, Michael C. Fu, Steven I. Marcus, Andrew E. B. Lim
• Keywords: Holder's Continuation Value, Linear Interpolation Function, Modeling And Simulation, Pricing Americanstyle Derivatives, WSC 2001