Analytic Representations and Approximations to American Option Pricing

B. S. Balakrishna
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B. S. Balakrishna: University of Colorado

Finance from University Library of Munich, Germany

Abstract: An exact integral representation is derived for the American option price. It is not easily solvable, but it leads to an efficient approximation scheme. The results obtained are very satisfactory and comparable to those available from other methods. In this method, critical stock prices can be computed with simple iterative techniques. The critical prices can then be used to compute the integral to obtain the option price. It is possible to compute corrections to this approximation if more accuracy is needed. The method is applied to puts and calls on stocks paying dividends.

JEL-codes: G1 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1996-02-15, Revised 1996-04-13
Note: 24 pages, PostScript File
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:9602002

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