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

Authors

DOI:

https://doi.org/10.23755/rm.v53i0.1629

Keywords:

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

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.

Author Biographies

  • Gilles Tamba Bokolo, University of Kinshasa
    Department of Mathematics, Statistics and Computer Sciences, College of Sciences and Technology, University of Kinshasa
  • Ngoyi Landu Tresor, University of Kinshasa
    Department of Mathematics, Statistics and Computer Sciences, College of Sciences and Technology, University of Kinshasa
  • Mabela Rostin, University of Kinshasa
    Department of Mathematics, Statistics and Computer Sciences, College of Sciences and Technology, University of Kinshasa
  • Rebecca Omana Walo, University of Kinshasa
    Department of Mathematics, Statistics and Computer Sciences, College of Sciences and Technology, University of Kinshasa

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Published

2024-12-31

Issue

Vol. 53 (2024)

Section

Volume 53-2024

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