The main objective of this paper is to present an algorithm of pricing perpetual American put options with asset-dependent discounting. The value function of such an instrument can be described as VAPutω(s)=supτ∈TEs[e−∫0τω(Sw)dw(K−Sτ)+], where T is a family of stopping times, ω is a discount function and E is an expectation taken with respect to a martingale measure. Moreover, we assume that the asset price process St is a geometric Lévy process with negative exponential jumps, i.e., St=seζt+σBt−∑i=1NtYi. The asset-dependent discounting is reflected in the ω function, so this approach is a generalisation of the classic case when ω is constant. It turns out that under certain conditions on the ω function, the value function VAPutω(s) is convex and can be represented in a closed form. We provide an option pricing algorithm in this scenario and we present exact calculations for the particular choices of ω such that VAPutω(s) takes a simplified form.
Optimal strong approximation of the one-dimensional squared Bessel process
