Valuing Finite-Lived Options as Perpetual

Peter Carr
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Peter Carr: Morgan Stanley

Finance from EconWPA

Abstract: We show how the value of a finite-lived option can be interpreted as the limit of a sequence of perpetual option values subject to default risk. This interpretation yields new closed form approximations for European and American option values in the Black Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient.

Keywords: American options; method of lines (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 1996-07-11
Note: Type of Document - Postscript - originally LaTeX; prepared on Unix - Tex; to print on Postscript; pages: 34; figures: included. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:9607002

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