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The Closed-form Solution for Pricing American Put Options

Author

Listed:
  • Wang Xiaodong

    (Room B1201, Hangnan Building, Zhichun Road, Haidian District, Beijing, China (100083))

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.

Suggested Citation

  • Wang Xiaodong, 2007. "The Closed-form Solution for Pricing American Put Options," Annals of Economics and Finance, Society for AEF, vol. 8(1), pages 197-215, May.
    • Handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:197-215
    as

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    References listed on IDEAS

    as
    1. Lyuu,Yuh-Dauh, 2002. "Financial Engineering and Computation," Cambridge Books, Cambridge University Press, number 9780521781718, September.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    American put option; Closed-form solution; Assets pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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