Short time asymptotics for American maximum options with a dividend-paying asset

Abstract

We investigate the asymptotic behaviors of American maximum options with dividend-paying assets near maturity. Using the exercise conditions of American options, we obtain the asymptotic forms of the two boundaries with respect to time-to-maturity. Furthermore, we derive the matched asymptotic expansion for the rescaled value function of American maximum option. The all results are provided with detailed computations and derivations. Numerical examples show that the asymptotic value function and exercise boundaries can provide an efficient alternative for the true ones, respectively.

Keywords

• american option
• minimum payoff
• optimal exercise/free boundary
• short time asymptotics