Valuing Finite-Lived Options as Perpetual

35 Pages Posted: 3 Oct 1996

See all articles by Dmitri Faguet

Dmitri Faguet

Johnson Wax, Ukraine

Peter Carr

New York University Finance and Risk Engineering

Date Written: June 21, 1996

Abstract

We show how the value of a finite-lived option can be interpreted as the limit of a sequence of perpetual option values subject to default risk. This interpretation yields new closed form approximations for European and American option values in the Black Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient.

JEL Classification: G12, G13

Suggested Citation

Faguet, Dmitri and Carr, Peter P., Valuing Finite-Lived Options as Perpetual (June 21, 1996). Available at SSRN: https://ssrn.com/abstract=706 or http://dx.doi.org/10.2139/ssrn.706

Dmitri Faguet

Johnson Wax, Ukraine ( email )

252073 Kiev
Ukraine
Not Available (Phone)
Not Available (Fax)

Peter P. Carr (Contact Author)

New York University Finance and Risk Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States
9176217733 (Phone)

HOME PAGE: http://engineering.nyu.edu/people/peter-paul-carr

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