revised_free_boundary_5_scales-1.pdf (245.81 kB)
Download fileOn a Free Boundary Problem for an American Put Option Under the CEV Process
journal contribution
posted on 2011-05-27, 00:00 authored by Miao Xu, Charles KnesslWe consider an American put option under the CEV process. This corresponds to a free boundary problem for a PDE. We show that this free boundary satisfies a nonlinear integral equation, and analyze it in the limit of small rho = 2r/sigma(2), where r is the interest rate and sigma is the volatility. We use perturbation methods to find that the free boundary behaves differently for five ranges of time to expiry.