Analytical American Option Pricing: The Flat-barrier Lower Bound

Alessandro Sbuelz

Economic Notes, 2004, vol. 33, issue 3, pages 399-413

Abstract: In a Black and Scholes (1973) world, this paper studies the pricing performance of a closed-form lower bound to American option values based on an exercise strategy corresponding to a flat-exercise boundary. The lower bound has a simple two-step implementation akin to Barone-Adesi and Whaley (1987) formula and shows superior pricing performance in the out-of-the-money region and for long maturities. Copyright Banca Monte dei Paschi di Siena SpA, 2004

Date: 2004
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