Valuing Finite-Lived Options as Perpetual
35 Pages Posted: 3 Oct 1996
Date Written: June 21, 1996
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: Suggested Citation