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On the valuation of American exchange options: an analytical approximation

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  • Andreas Andrikopoulos

Abstract

We adopt a quadratic approach to the valuation of the option to exchange one asset for another, when the option owner has the right to exercise before option expiration. Accurate pricing results are obtained and tested against competitive models in the literature, building on the hypothesis that option value is the product of two functions, one being a function of time and the other one being a function of the stock prices.

Suggested Citation

  • Andreas Andrikopoulos, 2010. "On the valuation of American exchange options: an analytical approximation," Applied Economics Letters, Taylor & Francis Journals, vol. 17(14), pages 1429-1435.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:14:p:1429-1435
    DOI: 10.1080/13504850903018705
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    References listed on IDEAS

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    1. Barone-Adesi, Giovanni, 2005. "The saga of the American put," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2909-2918, November.
    2. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
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