Annals of Operations Research

, Volume 260, Issue 1–2, pp 79–94 | Cite as

On the methods of pricing American options: case study

  • Burcu Aydoğan
  • Ümit Aksoy
  • Ömür Uğur
S.I.: Advances of OR in Commodities and Financial Modelling


In this study, a comparative analysis of numerical and approximation methods for pricing American options is performed. Binomial and finite difference approximations are discussed; furthermore, Roll-Geske-Whaley, Barone-Adesi and Whaley and Bjerksund-Stensland analytical approximations as well as the least-squares Monte Carlo method of Longstaff and Schwartz are presented. Applicability and efficiency in almost all circumstances, numerical solutions of the corresponding free boundary problem is emphasized. Methods used in pricing American options are also compared on dividend and non-dividend paying assets; and their pros and cons are discussed along with numerical experiments.


American options Numerical methods Analytical approximations Bounds 


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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Institute of Applied MathematicsMiddle East Technical UniversityÇankaya, AnkaraTurkey
  2. 2.Department of MathematicsAtilim UniversityIncek Gölbaşı, AnkaraTurkey

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