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Randomization and the American Put

Peter Carr

Morgan Stanley (United States)

Review of Financial Studies 1998

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 use a technique called randomization to value American puts and calls on dividend-paying stocks. This technique yields a new semiexplicit approximation for American option values in the Black-Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient.

DOI
10.1093/rfs/11.3.597
Volume
11 (3)
Pages
597-626
Language
en
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BibTeX
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