A1074
Title: Pricing formulas for perpetual American options with general payoffs
Authors: Mariano Rodrigo - University of Wollongong (Australia) [presenting]
Abstract: An American option gives the holder the right, but not the obligation, to buy/sell an underlying asset from/to the writer at an agreed strike price at any time on or before the expiry date. Options are mainly used for speculation and hedging. One of the attractions of options is that they can be used to construct a wide range of trading strategies characterised by different payoff functions. The pricing of perpetual American options with general payoffs is considered, where the perpetual American call and put are special cases. Four broad classes of payoff functions are identified for which analytical pricing formulas can be derived by utilising a Mellin transform technique and an optimisation procedure. Free boundary problems with one or two boundaries are obtained depending on the class of payoff functions considered. Illustrative examples are provided and benchmarked numerically with the binomial method. The characterisation of different payoffs for perpetual American options considered here will be instrumental in identifying and pricing new free boundary problems for (non-perpetual) American-style financial derivatives.
