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Randomization and the American Put

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  • Peter Carr

    (Morgan Stanley)

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    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 introduce a novel 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.

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    File URL: http://128.118.178.162/eps/fin/papers/9610/9610003.pdf
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    File URL: http://128.118.178.162/eps/fin/papers/9610/9610003.ps.gz
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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 9610003.

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    Length: 37 pages
    Date of creation: 15 Oct 1996
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:9610003

    Note: Type of Document - LaTeX; prepared on UNIX Sparc TeX; to print on PostScript; pages: 37 ; figures: included. This paper shows how randomization can be used to value American options in the Black Scholes model.
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    Web page: http://128.118.178.162

    Related research

    Keywords: randomization; American options;

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    1. Peter Carr & Robert Jarrow & Ravi Myneni, 1992. "Alternative Characterizations Of American Put Options," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 87-106.
    2. 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 637-54, May-June.
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