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Near Exact Calculation of American Options

Author

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  • Saied Simozar

Abstract

A new practical approach for the analysis of American (bond) options is developed which is a combination of the closed form solutions and binomial lattice models. The model is calibrated to the observed term structure of rates and traded volatilities and is arbitrage free. The convergence is very fast, but numerically intensive. By extrapolation the near exact premium of an American (bond) option can be calculated.

Suggested Citation

  • Saied Simozar, 2020. "Near Exact Calculation of American Options," Applied Economics and Finance, Redfame publishing, vol. 7(3), pages 55-69, May.
    • Handle: RePEc:rfa:aefjnl:v:7:y:2020:i:3:p:55-69
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    References listed on IDEAS

    as
    1. Dejun Xie, 2009. "Theoretical And Numerical Valuation Of Callable Bonds," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 3(2), pages 71-82.
    2. Barone-Adesi, Giovanni, 2005. "The saga of the American put," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2909-2918, November.
    3. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. "Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-320, June.
    4. Sullivan, Michael A, 2000. "Valuing American Put Options Using Gaussian Quadrature," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 75-94.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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