Approximating the exact value of an American option

Approximating the exact value of an American option

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An American option is a derivative security that can be exercised at any time before expiration.Under standard hypotheses it can be shown that its arbitrage-free price is the solution of an optimal stopping problem.Usually, if the underlying asset follows a diffusion, 3 Piece Sectional with Chaise the stopping time problem does not have a closed form solution.

Therefore, discrete time models have been proposed to determine an approximated solution.I formulate some conditions on the discrete process to insure convergence of the approximations to the exact value.I also show how to apply such conditions to check Dual Fuel Gas Range the correctness of some of the most popular discretization schemes.