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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Paper provided by EconWPA in its series Finance with number
9610003.
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. Contact details of provider: Web page: http://129.3.20.41
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Find related papers by JEL classification: G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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