On the binomial approximation of the American put

2018/02/15 by Damien Lamberton, Lamberton, Damien
Economics, Econometrics and Finance · Mathematics · #FOS: Economics and business #FOS: Mathematics #Mathematical Finance (q-fin.MF) #Pricing of Securities (q-fin.PR) #Probability (math.PR) #math.PR #q-fin.MF #q-fin.PR

paper · pdf · doi:10.48550/arxiv.1802.05614

Applied Mathematics and Optimization, Springer Verlag (Germany), In press

arxiv created 2018/12/11 · arxiv updated 2018/12/12

Abstract

We consider the binomial approximation of the American put price in the Black-Scholes model (with continuous dividend yield). Our main result is that the error of approximation is O((ln n) α /n) where n is the number of time periods and the exponent α is a positive number, the value of which may differ according to the respective levels of the interest rate and the dividend yield.

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