Pricing of perpetual American and Bermudan options by binomial tree method

doi:10.1007/s11464-007-0017-2

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

Pricing of perpetual American and Bermudan options by binomial tree method

LIN Jianwei¹, LIANG Jin²

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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.

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LIN Jianwei, LIANG Jin. Pricing of perpetual American and Bermudan options by binomial tree method. Front. Math. China, 2007, 2(2): 243‒256 https://doi.org/10.1007/s11464-007-0017-2