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A Decomposition Approach Via Fourier Sine Transform For Valuing American Knock-Out Options With Rebates, Nhat Tan Le, Duy-Minh Dang, Tran Vu Khanh

Faculty of Engineering and Information Sciences - Papers: Part A

We present an innovative decomposition approach for computing the price and the hedging parameters of American knock-out options with a time-dependent rebate. Our approach is built upon: (i) the Fourier sine transform applied to the partial differential equation with a finite time-dependent spatial domain that governs the option price, and (ii) the decomposition technique that partitions the price of the option into that of the European counterpart and an early exercise premium. Our analytic representations can generalize a number of existing decomposition formulas for some European-style and American-style options. A complexity analysis of the method, together with numerical results, show …