Fast Accurate Valuation of American Options
Posted: 20 Dec 1998
Date Written: June 29, 1994
We present a novel approach for contingent claim valuation in the Black Scholes model called the ANALYTIC METHOD OF LINES. The approach is applied to the valuation of American options for which early exercise is optimal. We develop explicit valuation formulae for both the option value and the critical stock price. The formulae are arbitrarily accurate and computationally efficient. We compare our results against other approaches and find significantly improved speed and accuracy.
JEL Classification: G13
Suggested Citation: Suggested Citation