Analysis of the optimal exercise boundary of American options for jump diffusions

Details Analysis of the optimal exercise boundary of American options for jump diffusions Analysis of the optimal exercise boundary of American options for jump diffusions

2007-12-20

arxiv.org/abs/0712.3323v6

Mathematics

Probability

Key Words: American put option, jump diffusions, smoothness of the early exercise boundary, integro-differential equations, pa

Scientific paper

In this paper we show that the optimal exercise boundary / free boundary of the American put option pricing problem for jump diffusions is continuously differentiable (except at the maturity). This differentiability result has been established by Yang et al. (European Journal of Applied Mathematics, 17(1):95-127, 2006) in the case where the condition $r\geq q+ \lambda \int_{\R_+} (e^z-1) \nu(dz)$ is satisfied. We extend the result to the case where the condition fails using a unified approach that treats both cases simultaneously. We also show that the boundary is infinitely differentiable under a regularity assumption on the jump distribution.

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