On the Signi cance of Capturing the Early Exercise Boundary for the American Put Price

Abstract

I show that the three-piece exponential boundary by Ju (1998) accurately 'tracks' the early exercise boundary. This results in more accurate option pricing than other comparable methods. Numerical results obtained in this paper agree that a multipiece exponential function approximation yields very accurate prices for short as well as moderate maturity put options. These results are partially at odds with previous research.