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.
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Paper provided by EconWPA in its series Finance with number
9602002.
Length: 24 pages Date of creation: 15 Feb 1996 Date of revision:
05 Mar 1996 Handle: RePEc:wpa:wuwpfi:9602002
Note: 24 pages, PostScript File Contact details of provider: Web page: http://129.3.20.41
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