TY - JOUR
T1 - The simplest American and Real Option approximations
T2 - Geske-Johnson interpolation in maturity and yield
AU - Chung, San Lin
AU - Shackleton, Mark
PY - 2003/9/15
Y1 - 2003/9/15
N2 - The American early exercise feature of the Real Option to invest in a new project is important in capital budgeting and project valuation. Closed form solutions for American, and therefore Real, Options are known for two special cases; an infinite horizon generates the Merton (Bell Journal of Economics, 4, 141-83, 1973) solution while a zero dividend yield on the project generates Black-Scholes (Journal of Political Economy, 81, 637-59, 1973) prices since early exercise is never optimal. Geske-Johnson (Journal of Finance, 39, 1511-24, 1984) approximation is extended to a bivariate case by assuming various forms of separability for option prices as a function of time to maturity and yield to produce fully explicit and asymptotically correct approximations. These methods are compared with another simple approximation method due to Barone-Adesi and Whaley (Journal of Finance, 42, 301-20, 1987) and MacMillan (Advances in Futures Options and Research, 2, 117-42, 1987) and the estimated error these expressions contain compared to an accurate numerical benchmark technique.
AB - The American early exercise feature of the Real Option to invest in a new project is important in capital budgeting and project valuation. Closed form solutions for American, and therefore Real, Options are known for two special cases; an infinite horizon generates the Merton (Bell Journal of Economics, 4, 141-83, 1973) solution while a zero dividend yield on the project generates Black-Scholes (Journal of Political Economy, 81, 637-59, 1973) prices since early exercise is never optimal. Geske-Johnson (Journal of Finance, 39, 1511-24, 1984) approximation is extended to a bivariate case by assuming various forms of separability for option prices as a function of time to maturity and yield to produce fully explicit and asymptotically correct approximations. These methods are compared with another simple approximation method due to Barone-Adesi and Whaley (Journal of Finance, 42, 301-20, 1987) and MacMillan (Advances in Futures Options and Research, 2, 117-42, 1987) and the estimated error these expressions contain compared to an accurate numerical benchmark technique.
UR - http://www.scopus.com/inward/record.url?scp=0344552372&partnerID=8YFLogxK
U2 - 10.1080/1350485032000138980
DO - 10.1080/1350485032000138980
M3 - 文章
AN - SCOPUS:0344552372
SN - 1350-4851
VL - 10
SP - 709
EP - 716
JO - Applied Economics Letters
JF - Applied Economics Letters
IS - 11
ER -