Frontiers of Mathematics in China >

2007 , Vol. 2 >Issue 2: 243 - 256

DOI: https://doi.org/10.1007/s11464-007-0017-2

Pricing of perpetual American and Bermudan options by binomial tree method

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  • 1.Department of Mathematics, Tongji University, Shanghai 200092, China; Department of Mathematics, Putian University, Putian 351100, China; 2.Department of Mathematics, Tongji University, Shanghai 200092, China

Published date: 05 Jun 2007

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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.

Cite this article

LIN Jianwei, LIANG Jin . Pricing of perpetual American and Bermudan options by binomial tree method[J]. Frontiers of Mathematics in China, 2007 , 2(2) : 243 -256 . DOI: 10.1007/s11464-007-0017-2

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