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Analytical American Option Pricing: The Flat‐barrier Lower Bound *
Author(s) -
Sbuelz Alessandro
Publication year - 2004
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/j.0391-5026.2004.00138.x
Subject(s) - upper and lower bounds , simple (philosophy) , economics , boundary (topology) , mathematical economics , black–scholes model , valuation of options , computer science , econometrics , mathematics , mathematical analysis , philosophy , volatility (finance) , epistemology
In a Black and Scholes (1973) world, this paper studies the pricing performance of a closed‐form lower bound to American option values based on an exercise strategy corresponding to a flat‐exercise boundary. The lower bound has a simple two‐step implementation akin to Barone‐Adesi and Whaley (1987) formula and shows superior pricing performance in the out‐of‐the‐money region and for long maturities.