The Closed-form Solution for Pricing American Put Options
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.
Year of publication: |
2007
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Authors: | Wang, Wang Xiaodong |
Published in: |
Annals of Economics and Finance. - China Economics and Management Academy, ISSN 1529-7373. - Vol. 8.2007, 1, 11, p. 197-215
|
Publisher: |
China Economics and Management Academy |
Subject: | American put option | Closed-form solution | Assets pricing |
Saved in:
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