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MaxwellSheffield
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Joined: December 17th, 2013, 11:08 pm

How would you price American options?

June 13th, 2018, 12:22 pm

Hello, 

This is an open question : How would you price an american option on future consistently with the smile ? 

For example, when it comes to pricing Eurodollar option, we often see the black formula used in an awkward way : 
- There is no margin process for the option, an american option should not be priced as a European.
- The future rate is not a martingale under the "T-forward measure" 
- Even if it was a European, payment occurs at the expiring date, not  "tenor"-month  later.
The american premium is not negligible , hence the need to model the future rate as well as the funding rate.
 
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Gamal
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Re: How would you price American options?

June 13th, 2018, 12:59 pm

Dupire callibrated to Europeans.
 
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MaxwellSheffield
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Re: How would you price American options?

June 13th, 2018, 1:19 pm

How about funding? 

What is European ? Option are american 
 
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agnoatto
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Re: How would you price American options?

June 25th, 2018, 12:30 pm

Do you mean that the presence of FVA etc should have an impact on the optimal exercise? Well Andrew Green has a paper on that on Risk, but I tend to believe that typically the optimal exercise is treated separately w.r.t. all xVAs like in the old single curve world...

At least, this seems to me a picture of what is happening in order to keep things short and simple.
Prof Alessandro Gnoatto, PhD
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Gamal
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Re: How would you price American options?

June 26th, 2018, 8:47 am

What is European ? Option are american 
As far as I know models should be calibrated.
 
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MaxwellSheffield
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Re: How would you price American options?

June 26th, 2018, 1:23 pm

What is European ? Option are american 
As far as I know models should be calibrated.
Well you obviously know nothing but you act like you know everything... It is not the first time, please move.
 
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MaxwellSheffield
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Re: How would you price American options?

June 26th, 2018, 1:34 pm

Do you mean that the presence of FVA etc should have an impact on the optimal exercise? Well Andrew Green has a paper on that on Risk, but I tend to believe that typically the optimal exercise is treated separately w.r.t. all xVAs like in the old single curve world...

At least, this seems to me a picture of what is happening in order to keep things short and simple.
Exactly, the thing is that without funding, it is never optimal to exercise whether it is a put or a call, hence it can be priced as a european. With funding it is a totally different story.... Even if we forget about FVA, and assume that we can lend/borrow at a theoretical risk free rate, the future option still cannot be priced as a european. In that situation , it is hard to capture the pure dynamics of the future rate from eurodollar option . I am going to find the paper you are talking about.
 
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Gamal
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Re: How would you price American options?

June 26th, 2018, 2:18 pm

What is European ? Option are american 
As far as I know models should be calibrated.
Well you obviously know nothing but you act like you know everything... It is not the first time, please move.
Why are you asking questions, when you don't want to hear any answers?
 
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MaxwellSheffield
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Re: How would you price American options?

June 27th, 2018, 11:30 am

As far as I know models should be calibrated.
Well you obviously know nothing but you act like you know everything... It is not the first time, please move.
Why are you asking questions, when you don't want to hear any answers?
you are seriously calling your posts answers? You drop 3 words showing that you have no clue about the topic... You know it is ok if you dont know the answer, that is why i am asking this question, i dont expect the answer to be common knowledge.
It is the technical section, if you wanna brag and patronize, go to the student forum . You are embarrassing yourself , please leave.
 
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Gamal
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Re: How would you price American options?

June 29th, 2018, 12:53 pm

you are seriously calling your posts answers?
I see, you're clever enough to judge people you've never met. But not enough to understand your business since you're asking elementary questions.
 
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MaxwellSheffield
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Joined: December 17th, 2013, 11:08 pm

Re: How would you price American options?

June 29th, 2018, 7:40 pm

you are seriously calling your posts answers?
I see, you're clever enough to judge people you've never met. But not enough to understand your business since you're asking elementary questions.
Elementary questions?!? haha, I am clever enough to recognize a fraud . Now cut if off and move away.
 
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Gamal
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Re: How would you price American options?

June 29th, 2018, 8:54 pm

You're a bit too short to command, dude.
 
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frolloos
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Re: How would you price American options?

June 30th, 2018, 8:23 am

@OP: what do you find so wrong about Gamal's answer? Black formula is just a quoting mechanism - nobody really uses it to price exotic / american options. Given European implied vols you calibrate your model of choice and use that to price whatever you need to price using your numerical scheme of choice.

Or have we completely misunderstood your question?

And here is a document that kind of explains why they are treated as European even though they're American:

https://developers.opengamma.com/quanti ... nGamma.pdf
 
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Cuchulainn
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Re: How would you price American options?

June 30th, 2018, 2:02 pm

As far as I know models should be calibrated.
Well you obviously know nothing but you act like you know everything... It is not the first time, please move.
Why are you asking questions, when you don't want to hear any answers?
You could try to communucate better. Instead of 1 line answer, take 2 line answer for starters.
 
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frolloos
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Location: Netherlands

Re: How would you price American options?

July 1st, 2018, 3:12 am

We all drop one-liners sometimes. It's not a reason for the OP to be agressive about it, and the OP hasn't replied to my question whether wéve completely misunderstood him, and in particular whether he still thinks Gamal's answers are really that far off the mark.
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