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Closed-form approximation of American options

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  • Bjerksund, Petter
  • Stensland, Gunnar

Abstract

This paper presents a closed-form approximation of the value of the finite-lived American option where the underlying asset provides a constant pay-out rate. It is derived by imposing a restriction on the set of feasible exercise strategies, and thus represents a lower bound to the option value. The exercise strategy is to exercise the option the first time the price of the underlying asset hits a flat boundary. Our numerical results show that this lower bound is very close to the true option value.

Suggested Citation

  • Bjerksund, Petter & Stensland, Gunnar, 1993. "Closed-form approximation of American options," Scandinavian Journal of Management, Elsevier, vol. 9(Supplemen), pages 87-99.
    • Handle: RePEc:eee:scaman:v:9:y:1993:i:supplement1:p:s87-s99
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