IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods

Listed author(s):
  • Mark Broadie
  • Jérôme B. Detemple
Registered author(s):

    In this paper we provide lower and upper bounds on the prices of American call and put options written on a dividend paying asset. Based on the bounds, we provide two option price approximations. Our second approximation, which uses both lower and upper bound information, has an average accuracy comparable to a 1000-step binomial tree with a computation speed comparable to a 50-step binomial tree. Put another way, our second approximation is 6 times more accurate than a 200-step binomial tree and is about 15 times faster than a 200-step binomial tree. Furthermore, the approximations are sufficiently simple that they can be computed in a spreadsheet. In addition, we conduct a careful large-scale evaluation of many recent methods for computing American option prices. Comparisons are made on the basis of accuracy and speed of computation and lead to some surprising results. Dans cet article nous proposons des bornes inférieures et supérieures sur les prix d'options américaines à l'achat et à la vente. Sur la base de ces bornes nous proposons deux approximations du prix de l'option. Notre deuxième approximation qui utilise à la fois l'information sur la borne inférieure et supérieure a une précision moyenne comparable à un arbre binomial de 1000 pas avec une vitesse de calcul comparable à un arbre binomial de 50 pas. En d'autre termes notre deuxième approximation est 6 fois plus précise qu'un arbre binomial à 200 pas et est 15 fois plus rapide qu'un arbre binomial à 200 pas. De plus les approximations sont suffisamment simple pour être calculées dans un tableur (spreadsheet). En outre, nous effectuons une évaluation soigneuse et sur grande échelle des nombreuses méthodes numériques qui ont été proposées récemment pour calculer les prix des options américaines. Ces comparaisons sont faites sur la base de la précision et de la vitesse de calcul et conduisent à certains résultats surprenant.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by CIRANO in its series CIRANO Working Papers with number 94s-07.

    in new window

    Length: 35 pages
    Date of creation: 01 Sep 1994
    Handle: RePEc:cir:cirwor:94s-07
    Contact details of provider: Postal:
    1130 rue Sherbrooke Ouest, suite 1400, Montréal, Quéc, H3A 2M8

    Phone: (514) 985-4000
    Fax: (514) 985-4039
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cir:cirwor:94s-07. 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: (Webmaster)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.