Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336316 
Year of Publication: 
2021
Citation: 
[Journal:] Latin American Journal of Central Banking (LAJCB) [ISSN:] 2666-1438 [Volume:] 2 [Issue:] 1 [Article No.:] 100025 [Year:] 2021 [Pages:] 1-24
Publisher: 
Elsevier, Amsterdam
Abstract: 
We develop a novel pricing strategy that approximates the value of an American option with exotic features through a portfolio of European options with different maturities. Among our findings, we show that: (i) our model is numerically robust in pricing plain vanilla American options; (ii) the model matches observed bids and premiums of multidimensional options that integrate ratchet, Asian, and barrier characteristics; and (iii) our closed-form approximation allows for an analytical solution of the option's greeks, which characterize the sensitivity to various risk factors. Finally, compared to the traditional Monte Carlo simulations method, we highlight that our estimation's prediction is more accurate and requires less than 1% of the computational time.
Subjects: 
American options
Asian options
Barrier options
Exotic currency options
Least squares Monte Carlo
Option pricing
Ratchet options
Weighted time value methodology
JEL: 
C53
E58
G13
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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