The Closed-form Solution for Pricing American Put Options

Xiaodong Wang ()

Annals of Economics and Finance, 2007, vol. 8, issue 1, 197-215

Abstract: This paper proposes a closed-form solution for pricing an American put option on a non-dividend paying stock based on an optimally early-exercise strategy. An American put option should be early-exercised when the maximum option premium of early exercise is not less than the value of its European counterpart; otherwise, it should not be early-exercised. This paper also shows that Merton (1973)¡¯s formula for pricing a perpetual American put option on a non-dividend paying stock is not perfect and shows such an option¡¯s value is equal to its strike price.

Keywords: American put option; Closed-form solution; Assets pricing (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2007:v:8:i:1:p:197-215

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