In a Black and Scholes (1973) world, this paper studies the pricing performance of a closed-form lower bound to American option values based on an exercise strategy corresponding to a flat-exercise boundary. The lower bound has a simple two-step implementation akin to Barone-Adesi and Whaley (1987) formula and shows superior pricing performance in the out-of-the-money region and for long maturities.
Sbuelz, A., Analytical American Option Pricing: The Flat-barrier Lower Bound, <<ECONOMIC NOTES>>, 2004; 33 (3): 399-413. [doi:10.1111/j.0391-5026.2004.00138.x] [http://hdl.handle.net/10807/22316]
Analytical American Option Pricing: The Flat-barrier Lower Bound
Sbuelz, Alessandro
2004
Abstract
In a Black and Scholes (1973) world, this paper studies the pricing performance of a closed-form lower bound to American option values based on an exercise strategy corresponding to a flat-exercise boundary. The lower bound has a simple two-step implementation akin to Barone-Adesi and Whaley (1987) formula and shows superior pricing performance in the out-of-the-money region and for long maturities.
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