Bounds on the American Option

Abstract

The essential feature of American style claims lies in the holder's right to time the exercise decision. The value of the claim depends on the information about future prices that the holder will acquire over time. Much of the literature makes restrictive assumptions about information revelation - for example that the underlying price process is Markov. This paper explores the upper bound on the price of an American option, placing no assumptions on the information structure. The analysis provides insight into the processes that make the American feature valuable, and points the way to hedging strategies for American options that are robust to model error.

Keywords: american, bounds, robust, super-replication

JEL Classification: C61, G13