“Calculating the optimal exercise boundary of American put options with an approximation formula” by Song-Ping ZHU
University of Wollongong
In this paper, an algorithm to improve the computational accuracy of the analytical approximation to the value of American put options and their optimal exercise boundary proposed by Zhu (2004) is presented. In the current approach, Zhu’s simple approximation formula is used as an initial guess for the optimal exercise boundary of American put options. The determination of an improved optimal exercise boundary is then achieved by setting a null value of the Theta of option value on the optimal exercise boundary. Test example results show that the improvement is indeed significant.