The early exercise boundary for the American put near expiry: numerical approximation

ABSTRACT. It is well known [11] that the early exercise boundary for the American put approaches the strike price at expiry with infinite velocity. This causes difficulties in de-veloping efficient and accurate numerical procedures and con-sequently trading strategies, during the volatile period near expiry. Based on the work of D. Ševčovic ̌ [10] for the Amer-ican call with dividend, an integral equation is derived for the free boundary for the American put which leads to an accurate numerical procedure and an interesting, and accu-rate, asymptotic solution for the early exercise boundary near expiry. 1. Introduction. Many differen