13.6
Quadratic Approximation
13.6
Quadratic Approximation
Barone-Adesi
and Whaley (1987) provide a fast way to compute the values of American options.
This method is called the quadratic approximation.
The method works by defining a "cutoff" value of the stock. For a put option, there is an early exercise premium only if
the stock price is less than the cutoff value.
For a dividend-paying call option, early exercise matters only if the
stock price exceeds a similar cutoff value.
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Financial Trading System