Strategic Timing in Financial Markets: Real Options Analysis of American Options

Gilles Tamba Bokolo, Ngoyi Landu Tresor, Mabela Rostin, Rebecca Omana Walo

Abstract


This paper delves into the nuanced realm of option pricing, focusing specifically on American call and put options within the framework of real options analysis. Traditional models often struggle to account for the complex decision-making process inherent in American options due to their early exercise feature. Leveraging the flexibility offered by real options methodology, this paper explores the optimal stopping time, a critical determinant in option pricing. Through a rigorous analytical approach and Monte Carlo simulations, we unveil explicit expressions for the optimal stopping time and option values. By bridging theory with practical application, this research offers valuable insights into the dynamics of American options and their pricing in real-world financial markets.

Keywords


Hamilton-Jacobi-Bellman (HJB) Equation; Payoff Functions; Optimal Stopping Time; American Call and Put Options; Real Options; Monte Carlo

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DOI: http://dx.doi.org/10.23755/rm.v53i0.1629

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Ratio Mathematica - Journal of Mathematics, Statistics, and Applications. ISSN 1592-7415; e-ISSN 2282-8214.