On a free boundary problem for an American put option under the CEV process |
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Authors: | Miao Xu Charles Knessl |
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Institution: | Department of Mathematics, Statistics and Computer Science, University of Illinois at Chicago, 851 S Morgan St, Chicago, IL 60607-7045, United States |
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Abstract: | We consider an American put option under the CEV process. This corresponds to a free boundary problem for a PDE. We show that this free boundary satisfies a nonlinear integral equation, and analyze it in the limit of small , where is the interest rate and is the volatility. We use perturbation methods to find that the free boundary behaves differently for five ranges of time to expiry. |
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