American-style options are Financial Derivatives that offer the flexibility of early exercise opportunities. This feature significantly influences their valuation methods and poses the difficulty of solving a dynamic optimization problem to determine the optimal exercise strategy.
This research proposes an efficient method for pricing a panel of American-style options integrating a Stochastic Dynamic Programming approach (SDP) to overcome computational challenges associated with estimation of Greeks and efficient calibration to market data. One significant advantage of the SDP is that its solution yields numerical approximations to option prices and sensitivities across the entire state-space partition. Through leveraging the homogeneity property, we efficiently value diverse options with varying moneyness and maturity levels.
The methodology is versatile, applicable to general models capturing interest rate term structures, showcasing the substantial benefits of our SDP method.