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Randomization and the American Put

Author

Listed:
  • Peter Carr

    (Morgan Stanley)

Abstract

While American calls on non-dividend paying stocks may be valued as European, there is no completely explicit exact solution for the values of American puts. We introduce a novel technique called randomization to value American puts and calls on dividend-paying stocks. This technique yields a new semi-explicit approximation for American option values in the Black Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient.

Suggested Citation

  • Peter Carr, 1996. "Randomization and the American Put," Finance 9610003, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9610003
    Note: Type of Document - LaTeX; prepared on UNIX Sparc TeX; to print on PostScript; pages: 37 ; figures: included. This paper shows how randomization can be used to value American options in the Black Scholes model.
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    References listed on IDEAS

    as
    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 637-654, May-June.
    2. 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..
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    randomization; American options;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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