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Analytic Representations and Approximations to American Option Pricing

Author

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  • B. S. Balakrishna

    (University of Colorado)

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.

Suggested Citation

  • B. S. Balakrishna, 1996. "Analytic Representations and Approximations to American Option Pricing," Finance 9602002, University Library of Munich, Germany, revised 13 Apr 1996.
    • Handle: RePEc:wpa:wuwpfi:9602002
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    References listed on IDEAS

    as
    1. Brennan, Michael J & Schwartz, Eduardo S, 1977. "The Valuation of American Put Options," Journal of Finance, American Finance Association, vol. 32(2), pages 449-462, May.
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    • G1 - Financial Economics - - General Financial Markets

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