An Alternative Formula to Price American Options
We give a new way to price American options, using Samuelson´s formula. We first obtain the option price corresponding to a European option at time t, weighting it by the probability that the underlying asset takes the value S at time t. This factor is given by the solution of the Fokker-Planck (Kolmogorov) equation for the transition probability density. The main advantage of this approach is that we can introduce systematically the effect of macroeconomic factors. If a macroeconomic framework is given by a dynamic system in the form of a set of ordinary differential equations we only have to solve a partial differential equation, for the transition probability density. In this context, we verify, for the sake of consistency, that this formula is consistent with the Black-Scholes model.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Broadie, Mark & Detemple, Jerome, 1996. "American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods," Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1211-50.
- Francesc Llerena-Garrés, 2000. "Una nota sobre valoración de opciones americanas y arbitraje," Investigaciones Economicas, Fundación SEPI, vol. 24(1), pages 207-218, January.
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
- Peter Carr & Robert Jarrow & Ravi Myneni, 2008.
"Alternative Characterizations Of American Put Options,"
World Scientific Book Chapters,
in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 5, pages 85-103
World Scientific Publishing Co. Pte. Ltd..
- Peter Carr & Robert Jarrow & Ravi Myneni, 1992. "Alternative Characterizations Of American Put Options," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 87-106.
- Geske, Robert & Johnson, Herb E, 1984. " The American Put Option Valued Analytically," Journal of Finance, American Finance Association, vol. 39(5), pages 1511-24, December.
- Sergei Levendorskii, 2004. "The American put and European options near expiry, under Levy processes," Papers cond-mat/0404103, arXiv.org.
- Rocío Elizondo & Pablo Padilla, 2008. "An Analytical Approach to Merton’s Rational Option Pricing Theory," Working Papers 2008-03, Banco de México.
- Bladt, Mogens & Rydberg, Tina Hviid, 1998. "An actuarial approach to option pricing under the physical measure and without market assumptions," Insurance: Mathematics and Economics, Elsevier, vol. 22(1), pages 65-73, May.
- Robert A. Jarrow, 1988. "Preferences, Continuity, and the Arbitrage Pricing Theory," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 159-172.
When requesting a correction, please mention this item's handle: RePEc:bdm:wpaper:2009-06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dirección de Sistemas)
If references are entirely missing, you can add them using this form.