A Better Approximate Formula for Pricing American Options
- Topics:
- Equity,
- Financial Research
- Tags:
- Approximation,
- Finance,
- Investment,
- Marketing,
- Marketing Research,
- Option,
- Pricing,
- Pricing Strategy
- Source:
- finance-research.net
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Overview: This paper presents a simple and precise analytical approximation method for pricing American options under Merton’s assumptions. It is a generalization of the approximations of the Partial Differential Equation (PDE) developed by McMillan, and Barone-Adesi and Whaley. The proposed solution is compared to other approximations, including the Cox, Ross and Rubinstein’s binomial tree. It provides for a faster convergence and is almost always more accurate. Since institutional portfolios usually contain large amounts of standard American options, this method can help speed up the determination of their Value at Risk.
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Format: PDF | Size: 1,347KB | Date: Dec 2000 | Pages: 33
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