Closed form valuation of American options

Abstract

This paper presents a simple and intuitive approximation of the American call and put value. The approximation generalizes the Bjerksund-Stensland model by dividing time to maturity into two periods, each with a flat early exercise boundary. By imposing a feasible but non-optimal exercise strategy, a lower bound to the true option value is obtained. Numerical investigations indicate that the method represents an accurate and extremely computer efficient approximation to the American option value.