Randomization and the American Put
38 Pages Posted: 31 Oct 1996
Date Written: October 15, 1996
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 introduce a novel technique called randomization to value American puts and calls on dividend-paying stocks. This technique yields a new semi-explicit approximation for American option values in the Black Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient.
JEL Classification: G13
Suggested Citation: Suggested Citation