Analysis of the optimal exercise boundary of American put option with delivery lags

Abstract

We show that an American put option with delivery lags can be decomposed as a European put option and another American-style derivative. The latter is an option for which the investor receives the Greek Theta of the corresponding European option as the running payoff, and decides an optimal stopping time to terminate the contract. Based on the this decomposition, we further show that the associated optimal exercise boundary exists, and is a strictly increasing and smooth curve. We also analyze its asymptotic behavior for both large maturity and small time lag using the free-boundary method.Comment: 28 pages, 5 figure