News for hackers. Stuff that matters.

A comment on Pricing Americans with Finite-Difference. Parent comment

Re:Pricing Americans with Finite-Difference by leplen on Friday December 22, 2023 @04:22PM (#38738817)
American options can be exercised at any time at the investor's discretion. This means the instrument has a maximum duration, but the actual duration is up to choice of the option holder, which you can't model with an equation.
[ Parent | on HN ]
Re:Pricing Americans with Finite-Difference by auc on Friday December 22, 2023 @05:42PM (#38739449)
This is subtly incorrect.

An American option should be priced assuming that the option is optimally exercised, otherwise this would create a soft arbitrage opportunity. The difficulty is determining when the option is optimally exercised because it depends on several potentially unknown and difficult to model factors.

[ Parent | on HN ]
Re:Pricing Americans with Finite-Difference by l33t7332273 on Friday December 22, 2023 @06:50PM (#38740116)
Why does having variable duration mean an equation cannot model this type of option?
[ Parent | on HN ]
Re:Pricing Americans with Finite-Difference by hfhdjdks on Friday December 22, 2023 @07:06PM (#38740262)
The point is not whether it can be modeled (it can), but whether you can get a closed form solution for it (you can't...or we don't know how for now)
[ Parent | on HN ]