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On the quadratic approximation to the value of American put options: a note


  • Andreas Andrikopoulos


This article extends the quasi-analytical quadratic approximation of Barone-Adesi and Whaley (1987) in order to improve its performance for options with long time to expiration. We build a system of equations with an extra parameter and an additional boundary condition ('boundary-optimality'), ensuring that the derived exercise boundary maximizes the price of the option. Numerical results for this approach show improved convergence performance for the quadratic approximation in the case of longer option lives.

Suggested Citation

  • Andreas Andrikopoulos, 2007. "On the quadratic approximation to the value of American put options: a note," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(5), pages 313-317.
  • Handle: RePEc:taf:apfelt:v:3:y:2007:i:5:p:313-317 DOI: 10.1080/17446540600993852

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    References listed on IDEAS

    1. Carlo Alberto Magni, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(2), pages 137-140.
    2. Bierman, Harold, Jr & Hass, Jerome E, 1973. "Capital Budgeting Under Uncertainty: A Reformulation," Journal of Finance, American Finance Association, vol. 28(1), pages 119-129, March.
    3. Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-756, December.
    4. Stapleton, Richard C, 1974. "Capital Budgeting under Uncertainty: A Reformation: Comment," Journal of Finance, American Finance Association, vol. 29(5), pages 1583-1584, December.
    5. Litzenberger, Robert H. & Budd, Alan P., 1970. "Corporate Investment Criteria and the Valuation of Risk Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(4-5), pages 395-419, December.
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    Cited by:

    1. Kimura, Toshikazu, 2010. "Valuing executive stock options: A quadratic approximation," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1368-1379, December.

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