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The Closed-form Solution for Pricing American Put Options

  • Wang Xiaodong

    (Room B1201, Hangnan Building, Zhichun Road, Haidian District, Beijing, China (100083))

This paper proposes a closed-form solution for pricing an American put option on a non-dividend paying stock based on an optimally early-exercise strategy. An American put option should be early-exercised when the maximum option premium of early exercise is not less than the value of its European counterpart; otherwise, it should not be early-exercised. This paper also shows that Merton (1973)¡¯s formula for pricing a perpetual American put option on a non-dividend paying stock is not perfect and shows such an option¡¯s value is equal to its strike price.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 8 (2007)
Issue (Month): 1 (May)
Pages: 197-215

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Handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:197-215
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  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 637-54, May-June.
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