Randomization and the American Put

Peter Carr
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Peter Carr: Morgan Stanley

Finance from EconWPA

Abstract: While American calls on non-dividend paying stocks may be valued as European, there is no completely explicit exact solution for the values of American puts. We introduce a novel technique called randomization to value American puts and calls on dividend-paying stocks. This technique yields a new semi-explicit approximation for American option values in the Black Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient.

Keywords: randomization; American options (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 1996-10-15
Note: Type of Document - LaTeX; prepared on UNIX Sparc TeX; to print on PostScript; pages: 37 ; figures: included. This paper shows how randomization can be used to value American options in the Black Scholes model.
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:9610003

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