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Title: Exercise regions and efficient valuation of American lookback options
Authors: Lai, T.L.
Lim, T.W. 
Keywords: American lookback option
Optimal stopping problem
Space-time transformation
Issue Date: Apr-2004
Citation: Lai, T.L., Lim, T.W. (2004-04). Exercise regions and efficient valuation of American lookback options. Mathematical Finance 14 (2) : 249-269. ScholarBank@NUS Repository.
Abstract: This paper presents an efficient method to compute the values and early exercise boundaries of American fixed strike lookback options. The method reduces option valuation to a single optimal stopping problem for standard Brownian motion and an associated path-dependent functional, indexed by one parameter in the absence of dividends and by two parameters in the presence of a dividend rate. Numerical results obtained by this method show that, after a space-time transformation, the stopping boundaries are well approximated by certain piecewise linear functions with a few pieces, leading to fast and accurate approximations for American lookback option values. An explicit decomposition formula for American lookback options is derived and applied not only to the development of these approximations but also to the asymptotic analysis of the early exercise boundary near the expiration date.
Source Title: Mathematical Finance
ISSN: 09601627
DOI: 10.1111/j.0960-1627.2004.00191.x
Appears in Collections:Staff Publications

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