Near Exact Calculation of American Options

Saied Simozar

Abstract


A new practical approach for the analysis of American (bond) options is developed which is a combination of the closed form solutions and binomial lattice models. The model is calibrated to the observed term structure of rates and traded volatilities and is arbitrage free. The convergence is very fast, but numerically intensive. By extrapolation the near exact premium of an American (bond) option can be calculated.


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DOI: https://doi.org/10.11114/aef.v7i3.4681

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Applied Economics and Finance    ISSN 2332-7294 (Print)   ISSN 2332-7308 (Online)

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