We thank Kaushik Amin, Giovanni Barone-Adesi, Warren Bailey, Darrell Duffie, Robert Elliott, Leslie Greengard, David Heath, Steve Heston, Farshid Jamshidian, Ioannis Karatzas, Damien Lamberton, Larry Merville, Stephen Ross, David Shimko, Chester Spatt, John Strain, Ravi Viswanathan, and the participants of workshops at Vanderbilt University and Cornell University. the first two authors are grateful for financial support from Banker's Trust. We are particularly grateful to Henry McKean for many valuable discussions.
ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS
Version of Record online: 6 DEC 2006
Volume 2, Issue 2, pages 87–106, April 1992
How to Cite
Carr, P., Jarrow, R. and Myneni, R. (1992), ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS. Mathematical Finance, 2: 87–106. doi: 10.1111/j.1467-9965.1992.tb00040.x
- Issue online: 6 DEC 2006
- Version of Record online: 6 DEC 2006
- August 1990 February 1992
- American put options;
- European put options;
- local time;
- free boundary-problem;
- optimal stopping problem
We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European put price and the early exercise premium. We then represent the European put price in a new manner. This representation allows us to alternatively decompose the price of an American put option into its intrinsic value and time value, and to demonstrate the equivalence of our results to the McKean equation.