Problem bank

Problem 219 of 333HardFinanceP219

The perpetual American put

  1. In the Black-Scholes model (risk-free rate rr, volatility σ\sigma, no dividends), an American put with strike KK never expires. Find the optimal exercise rule and the price as a function of SS. Evaluate for K=100K = 100, r=3%r = 3\%, σ=30%\sigma = 30\% and S=100S = 100.