American put options with regime-switching volatility

American put options with regime-switching volatility

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We present an approach for pricing American put options with a regime-switching volatility.Our method reveals that the option price can be expressed as the sum of two components: the price of a European put option and the premium associated with the early exercise privilege.Our analysis demonstrates that, under these conditions, the perpetual put option consistently commands a higher price during periods of high volatility compared to those g5210t-p90 of low volatility.Moreover, we establish that the optimal exercise boundary is lower in high-volatility regimes than in low-volatility regimes.Additionally, we develop an analytical framework to describe American puts with an Erlang-distributed random-time horizon, which allows us to propose a weboost splitter numerical technique for approximating the value of American puts with finite expiry.

We also show that a combined approach involving randomization and Richardson extrapolation can be a robust numerical algorithm for estimating American put prices with finite expiry.