PPT Slide

Valuation of American options

The life of an American put option is divided into N subintervals of length Dt.

Let fij denote the value of an American option at time iDt when the stock price is Sujdi-j for 0 ? i ? N and 0 ? j ? i.

At expiration, the terminal payoff of the put option is

Dynamic programming procedure applied at each binomial

node to incorporate the early exercise feature.

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