Physical Sciences and Mathematics Commons^™

A Closed-Form Exact Solution For The Value Of American Put And Its Optimal Exercise Boundary, Song-Ping Zhu

Professor Song-Ping Zhu

Searching for a closed-form exact solution for American put options under the Black-Scholes framework has been a long standing problem in the past; many researchers believe that it is impossible to find such a solution. In this paper, a closed-form exact solution, in the form of a Taylor's series expansion, of the well-known Black-Scholes equation is presented for the first time. As a result of this analytic solution, the optimal exercise boundary, which is the main difficulty of the problem, is found as an explicit function of the risk-free interest rate, the volatility and the time to expiration.