Pricing the American Options: A Closed-Form, Simple Formula
10 Pages Posted: 15 Jun 2019 Last revised: 7 Apr 2021
Date Written: June 2, 2019
Abstract
We overcome a major obstacle in the literature. In doing, we introduce a simple, closed-form formula for pricing the American options. In particular, we significantly simplify Alghalith's closed-form formula for pricing American options. In doing so, we introduce a formula that does not require the unknown expected consumption ϕ. This is a vast simplification since the estimation of ϕ is challenging. That is, similar to a European option, we only need to know the interest rate and volatility. Furthermore, we derive an exact upper bound for the price.
Keywords: American option pricing, closed-form formula, generalized Black-Scholes PDE, Alghalith (2018)
JEL Classification: G0, C5
Suggested Citation: Suggested Citation