An Explicit Solution for Perpetual American Put Options in a Markov-Modulated Jump Diffusion Model

Jinying Tong, Zhenzhong Zhang


This paper is concerned with  the pricing of perpetual American put options when the dynamics of the risky underlying asset are driven by a jump diffusion with Markovian switching. By using  the ``modified smooth pasting'' technique, we derive an explicit optimal stopping rule and the corresponding value function in a closed form.  Finally, we present a numerical example to illustrate the application of the exact solution.

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