Pricing American Options by Exercise Rate Optimization

Understand

We present a novel method for the numerical pricing of American options based on Monte Carlo simulation and the optimization of exercise strategies.

• Previous solutions to this problem either explicitly or implicitly determine so-called optimal exercise regions, which consist of points in time and space at which a given option is exercised.
• In contrast, our method determines the exercise rates of randomized exercise strategies.
• We show that the supremum of the corresponding stochastic optimization problem provides the correct option price.