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Rev Fin 1996; 9:277-300
© 1996 the Society for Financial Studies

Article

Pricing and hedging American options: a recursive investigation method

J Huang, MG Subrahmanyam and GG Yu
Correspondence: MG Subrahmanyam, Stern School of Business, Finance Department, New York University, 44 West 4th Street, Suite 9-190, New York, NY 10012, USA

Abstract

In this article we present a new method for pricing and hedging American options along with an efficient implementation procedure. The proposed method is efficient and accurate in computing both option values and various option hedge parameters. We demonstrate the computational accuracy and efficiency of this numerical procedure in relation to other competing approaches. We also suggest how the method can be applied to the case of any American option for which a closed-form solution exists for the corresponding European options.


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