Abstract:
This paper presents a generalisation of Mckean's free boundary value problem for American
options by considering an American strangle position, where cxereising one side of the payoff
early knocks-out the remaining side. The Fourier transform technique is used to derive a coupled
integral equation system for the strangle's free boundaries.A numerical algorithmis provided to
solve this system, and these free boundaries are then used to determine the price of the American
strangle position. Numerical comparisons between the strangle price and the price of a portfolio
formed using a long Americancall and a long American put option are presented.
