Pricing the American Options: A Closed-Form, Simple Formula

10 Pages Posted: 15 Jun 2019 Last revised: 7 Apr 2021

See all articles by Moawia Alghalith

Moawia Alghalith

University of the West Indies (UWI)

Date Written: June 2, 2019

Abstract

We overcome a major obstacle in the literature. In doing, we introduce a simple, closed-form formula for pricing the American options. In particular, we significantly simplify Alghalith's closed-form formula for pricing American options. In doing so, we introduce a formula that does not require the unknown expected consumption ϕ. This is a vast simplification since the estimation of ϕ is challenging. That is, similar to a European option, we only need to know the interest rate and volatility. Furthermore, we derive an exact upper bound for the price.

Keywords: American option pricing, closed-form formula, generalized Black-Scholes PDE, Alghalith (2018)

JEL Classification: G0, C5

Suggested Citation

Alghalith, Moawia, Pricing the American Options: A Closed-Form, Simple Formula (June 2, 2019). Available at SSRN: https://ssrn.com/abstract=3397938 or http://dx.doi.org/10.2139/ssrn.3397938

Moawia Alghalith (Contact Author)

University of the West Indies (UWI) ( email )

Trinidad and Tobago

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