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Analysis of the free boundary for the pricing of an American call option

Published online by Cambridge University Press:  17 May 2001

DANIEL šEVČOVIČ
DANIEL šEVČOVIČ
Affiliation:
Institute of Applied Mathematics, Faculty of Math. & Physics, Comenius University, 842 48 Bratislava, Slovak Republic; Email: sevcovic@fmph.uniba.sk
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Abstract

The purpose of this paper is to analyse the free boundary problem for the Black–Scholes equation for pricing the American call option on stocks paying a continuous dividend. Using the Fourier integral transformation method, we derive and analyse a nonlinear singular integral equation determining the shape of the free boundary. Numerical experiments based on this integral equation are also presented.

Type
Research Article
Information
European Journal of Applied Mathematics , Volume 12 , Issue 1 , February 2001 , pp. 25 - 37
Copyright
2001 Cambridge University Press

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