Numerical Evaluation of the Critical Price and American Options

Walter Allegretto, Giovanni Barone-Adesi and Robert J. Elliott

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: An approximate solution to the American put value is proposed and implemented numerically. Relaxation techniques enable the critical price to be determined with high accuracy. The method uses a modification of the quadratic approximation of MacMillan and Barone-Adesi and Whaley which gives an expression for the critical price. Numerical experimentation and iterative methods quickly provide highly accurate solutions.

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