Author(s)

Sunday Emmanuel Fadugba, Chuma Raphael Nwozo

Department of Mathematical Sciences, Ekiti State University, Ado Ekiti, Nigeria.
Department of Mathematics, University of Ibadan, Oyo State, Nigeria.

In this paper we present the Mellin transform method for the valuation of the American power put option with non-dividend and dividend yields, respectively. We use the Mellin transform method to derive the integral representations for the price and the free boundary of the American power put option. We also extend our results to derive the free boundary and the fundamental analytic valuation formula for perpetual American power put option which has no expiry date. Numerical experiments have shown that the Mellin transform method is a better alternative technique compared to the binomial model (BSM), recursive method (RM) and finite difference method (FDM) for the valuation of the American power put option. In general, the Mellin transform method is accurate, flexible and produces accurate prices for the optimal exercise boundary of the American power put option for a wide range of parameters. Hence the Mellin transform method is mutually consistent and agrees with the values of the analytic option valuation formula called the “Black-Scholes model”.

American Power Option, Dividend Yield, Mellin Transform Method, Non-Dividend Yield, Perpetual Power Put Option

Fadugba, S. and Nwozo, C. (2015) Mellin Transform Method for the Valuation of the American Power Put Option with Non-Dividend and Dividend Yields. Journal of Mathematical Finance, 5, 249-272. doi: 10.4236/jmf.2015.53023.