Pricing and exercising American options in a market-consistent way
This paper develops market-consistent pricing theory and optimal exercise strategies for American options via replication and martingale measures.
What it examines
This paper develops a new direct method to determine market-consistent prices for European and American options without heavy duality theory. It offers natural exercise strategies, separate seller and buyer pricing, and recursive techniques using basic market conditions. The aim is to simplify option pricing and enhance financial understanding.
What it concludes
The study shows that market-consistent price bounds can be represented using equivalent martingale measures and optimal stopping times. This work improves the transparency of option pricing with potential applications in finance, investment strategies, risk management, and teaching. Future research may further refine these models.
Evidence objects
Researchers unveil a novel, market-consistent framework for pricing American options, bypassing traditional duality and martingale complexities while utilizing baskets of European payoff streams to naturally derive optimal exercise strategies effectively.
key_findings bullet 1 · key_findings · validation V0
Surprisingly, the study finds that American options optionality does not add extra value, as replicable options may not enrich investor opportunities, challenging conventional assumptions and highlighting market efficiency indeed robustly.
key_findings bullet 2 · key_findings · validation V0
The authors introduce new terminologysuch as $$\text{market-consistent seller price}$$ and $$\text{buyer pricing strategy}$$providing clearer economic interpretations with backward induction in discrete-time models, despite assumptions limiting practical application in some cases.
key_findings bullet 3 · key_findings · validation V0
This paper introduces a market-consistent pricing approach for American options, presenting an original and novel perspective deviating from standard arbitrage-free methods. It simplifies complex martingale theory and addresses exercise strategies in incomplete markets, making it a read for quantitative finance specialists focused on innovative derivative modeling and volatility analysis remarkably.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … prices, ie, prices that preclude arbitrage opportunities when the payoff is added to the market as a new security… a new security leaves original security prices unchanged — …
Source row: 1599 · abstract type: snippet