Pricing American exchange options in a jump-diffusion model

A way to estimate the value of an American exchange option when the underlying assets follow jump-diffusion processes is presented. T he estimate is based on combining a European exchange option and a Bermudan exchange option with two exercise dates by using Richardson extrapolation as proposed by R. Geske and H. Johnson (1984). Closed-form solutions for the values of European and Bermudan exchange options are derived. Several numerical examples are presented, illustrating that the early exercise feature may have a significant economic value. The results presented should have potential for pricing over-the-counter options and in particular for pricing real options. (c) 2007 Wiley Periodicals, Inc.