Closed-form approximation of American options

Petter Bjerksund and Gunnar Stensland

Scandinavian Journal of Management, 1993, vol. 9, issue Supplement 1, S87-S99

Abstract: This paper presents a closed-form approximation of the value of the finite-lived American option where the underlying asset provides a constant pay-out rate. It is derived by imposing a restriction on the set of feasible exercise strategies, and thus represents a lower bound to the option value. The exercise strategy is to exercise the option the first time the price of the underlying asset hits a flat boundary. Our numerical results show that this lower bound is very close to the true option value.

Keywords: American; option; approximation; closed-form; finite-lived; lower; bound (search for similar items in EconPapers)
Date: 1993
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