American Option Pricing in Regime Switching Models

Abstract

The objective of this project is to examine the literature on the pricing of American options in some theoretical market models. The initial motivation was to examine the pricing of American options in a semi-Markov regime-switching model, which did not become possible due to the time constraints. This thesis presents a survey of literature I have covered in this regard. In the first chapter, some theorems and results from stochastic calculus, needed for understanding the literature, are summarised. In the second chapter contingent claims, hedging, and stochastic representations of option prices are examined. The third chapter examines literature about pricing American options under a regime-switching model. Since it is often a difficult task to get closed-form solutions for pricing options, certain approximation methods are listed.