Stochastic Optimal Control Approach for American Option Valuation
by
H.C. Jimbo
RISE, Waseda University, Tokyo, Japan and ETH/UNI. Zurich, Switzerland
Coauthors: B.Hertach, T.Suzuki

Valuation and optimal exercise of an American Option remain one of the most challenging problems in Option Pricing Theory. In recent years, several methods have been proposed to address this curse of dimentionality. Instead of using the traditional deterministic approaches, these methods use Monte Carlo Simulation to estimate option prices (see for example Bossaert 1998). In this note, we use the Newton Raphson Algorithm to estimate the price of an American Option. The initial value of our iteration is carefully chosen and the convergence of our method is also easily proved.

Date received: January 27, 2007