A Simple and Numerically Efficient Valuation Method for American Puts Using a Modified Geske-Johnson Approach

Abstract

ABSTRACT Geske and Johnson (1984) develop an equation for the American put price and obtain accurate prices using a method requiring quadrivariate normal integrals evaluated over an interval containing four equally spaced exercise points. We show that a modification of their method which uses optimal placement of exercise points yields in most cases accurate values using nothing more than bivariate normals. In the more difficult (deep‐in‐the‐money) cases, trivariate normals suffice.

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