Randomization and the American Put

Abstract

While American calls on non-dividend-paying stocks may be valued as European, there is no completely explicit exact solution for the values of American puts. We use a technique called randomization to value American puts and calls on dividend-paying stocks. This technique yields a new semiexplicit approximation for American option values in the Black-Scholes model. Numerical results indicate that the approximation is both accurate and computationally efficient.