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Randomization and the American Put

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  • Carr, Peter

Abstract

While American calls on non-dividend-paying stocks may be valued as European, there is no completely explicit exact solution for the values of American puts. We use a technique called randomization to value American puts and calls on dividend-paying stocks. This technique yields a new semi-explicit approximation for American option values in the Black-Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Carr, Peter, 1998. "Randomization and the American Put," The Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 597-626.
    • Handle: RePEc:oup:rfinst:v:11:y:1998:i:3:p:597-626
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    References listed on IDEAS

    as
    1. 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.
    2. Peter Carr & Robert Jarrow & Ravi Myneni, 2008. "Alternative Characterizations Of American Put Options," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 5, pages 85-103, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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