The Valuation of American Options on Multiple Assets
Posted: 2 Oct 1999
Date Written: July 1994
In this paper we provide valuation formulas for several types of American options on two or more assets. First we characterize the optimal exercise regions and provide valuation formulas for a number of American option contracts on multiple underlying assets with convex payoff functions. Examples include options on the maximum of two assets, dual strike options, spread options, exchange options, options on the product and powers of the product, and options on the arithmetic average of two assets. Second, we also consider a class of contracts with non-convex payoffs, such as American capped exchange options. For this option we explicitly identify the optimal exercise boundary and provide a decomposition of the price in terms of a capped exchange option with automatic exercise at the cap and an early exercise premium involving the benefits of exercising prior to reaching the cap.
JEL Classification: G12, G13
Suggested Citation: Suggested Citation