Search

We consider series solutions for the location of the optimal exercise boundary of an American option close to expiry. By using Monte Carlo methods, we compute the expected value of an option if the holder uses the approximate location given by such a series as his exercise strategy, and compare this value to the actual value of the option. This gives an alternative method to evaluate approximations. We find the series solution for the call performs excellently under this criterion, even for large times, while the asymptotic approximation for the put is very good near to expiry but not so good further from expiry.

American call options are financial derivatives that give the holder the right but not the obligation to buy an underlying security at a pre-determined price. They differ from European options in that they may be exercised at any time prior to their expiration, rather than only at expiration. Their value is described by the Black-Scholes PDE together with a constraint that arises from the possibility of early exercise. This leads to a free boundary problem for the optimal exercise boundary, which determines whether or not it is beneficial for the holder to exercise the option prior to expiration. However, an exact solution cannot be found, and therefore by using asymptotic techniques employed in the study of boundary layers in fluid mechanics, we find an asymptotic expression for the location of the optimal exercise boundary and the value of the option near to expiration.

An American put option is a derivative financial instrument that gives its holder the right but not the obligation to sell an underlying security at a pre-determined price. American options may be exercised at any time prior to expiry at the discretion of the holder, and the decision as to whether or not to exercise leads to a free boundary problem. In this paper, we examine the behavior of the free boundary close to expiry. Working directly with the underlying PDE, by using asymptotic expansions, we are able to deduce this behavior of the boundary in this limit.

Using a nonlinear critical layer analysis, we derive a nonlinear evolution equation governing the spatial growth of a pair of helical instability waves that are superimposed on an inviscid cylindrical jet. We consider the stage of evolution in which the growth first becomes nonlinear, with the nonlinearity appearing inside the critical layer. This evolution equation is of the same form as that for a pair of oblique waves superimposed on a shear layer (Goldstein and Choi, 1989. J. Fluid Mech.207, 97-120), namely an integro-differential equation with a cubic nonlinearity. As shown in related work for other flows, these equations may develop a singularity at a finite distance downstream.

Using a nonlinear critical layer analysis, we find a class of steady state, finite-amplitude waves in the Garcia model of an inviscid stratified shear layer. The vorticity distribution inside the vortex cores is similar to that of the family of two-dimensional vortices, known as Stuart vortices, found by Stuart (1967) in a homogeneous shear layer. The solutions obtained are compared with those previously obtained using similar techniques, but for which the Prandtl-Batchelor theorem had been invoked inside closed streamlines to justify the homogenization of vorticity therein.

A simple model equation for western boundary outflow in the Stommel model of the large scale ocean circulation is obtained by evaluating the potential vorticity equation at the western boundary. A series solution to this model equation demonstrates similar behavior to the boundary layer solution of the potential vorticity equation, in particular that “resonances” are present at a discrete series of parameter values which necessitate the addition of logarithms to the series; these resonances occur because the model equation has a logarithmic branch point at these values.

We consider series solutions for the location of the optimal exercise boundary of an American option close to expiry. By using Monte Carlo methods, we compute the expected value of an option if the holder uses the approximate location given by such a series as his exercise strategy, and compare this value to the actual value of the option. This gives an alternative method to evaluate approximations. We find the series solution for the call performs excellently under this criterion, even for large times, while the asymptotic approximation for the put is very good near to expiry but not so good further from expiry.

American call options are financial derivatives that give the holder the right but not the obligation to buy an underlying security at a pre-determined price. They differ from European options in that they may be exercised at any time prior to their expiration, rather than only at expiration. Their value is described by the Black-Scholes PDE together with a constraint that arises from the possibility of early exercise. This leads to a free boundary problem for the optimal exercise boundary, which determines whether or not it is beneficial for the holder to exercise the option prior to expiration. However, an exact solution cannot be found, and therefore by using asymptotic techniques employed in the study of boundary layers in fluid mechanics, we find an asymptotic expression for the location of the optimal exercise boundary and the value of the option near to expiration.

An American put option is a derivative financial instrument that gives its holder the right but not the obligation to sell an underlying security at a pre-determined price. American options may be exercised at any time prior to expiry at the discretion of the holder, and the decision as to whether or not to exercise leads to a free boundary problem. In this paper, we examine the behavior of the free boundary close to expiry. Working directly with the underlying PDE, by using asymptotic expansions, we are able to deduce this behavior of the boundary in this limit.