Pricing of perpetual American and Bermudan options by binomial tree method

Jianwei Lin; Jin Liang

doi:10.1007/s11464-007-0017-2

Front. Math. China ›› 2007, Vol. 2 ›› Issue (2) : 243 -256. DOI: 10.1007/s11464-007-0017-2

Research Article

Pricing of perpetual American and Bermudan options by binomial tree method

Jianwei Lin ¹^,²
, Jin Liang ¹^,^b

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Abstract

In this paper, we consider the binomial tree method for pricing perpetual American and perpetual Bermudan options. The closed form solutions of these discrete models are solved. Explicit formulas for the optimal exercise boundary of the perpetual American option is obtained. A nonlinear equation that is satisfied by the optimal exercise boundaries of the perpetual Bermudan option is found.

Keywords

binomial tree method / perpetual American option / perpetual Bermudan option / optimal exercise boundary / contraction mapping

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Jianwei Lin, Jin Liang. Pricing of perpetual American and Bermudan options by binomial tree method. Front. Math. China, 2007, 2(2): 243-256 DOI:10.1007/s11464-007-0017-2

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References

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