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optstockbybjs

Price American options using Bjerksund-Stensland 2002 option pricing model

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Syntax

Price = optstockbybjs(RateSpec,StockSpec,Settle,Maturity,OptSpec,Strike)

Description

example

Price = optstockbybjs(RateSpec,StockSpec,Settle,Maturity,OptSpec,Strike) computes American option prices with continuous dividend yield using the Bjerksund-Stensland 2002 option pricing model.

Note

optstockbybjs computes prices of American options with continuous dividend yield using the Bjerksund-Stensland option pricing model.

Examples

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Open Live Script

This example shows how to compute the American option prices with continuous dividend yield using the Bjerksund-Stensland 2002 option pricing model. Consider two American stock options (a call and a put) with an exercise price of $100. The options expire on April 1, 2008. Assume the underlying stock pays a continuous dividend yield of 4% as of January 1, 2008. The stock has a volatility of 20% per annum and the annualized continuously compounded risk-free rate is 8% per annum. Using this data, calculate the price of the American call and put, assuming the following current prices of the stock: $90 (for the call) and $120 (for the put).

Settle = 'Jan-1-2008';
Maturity = 'April-1-2008';
Strike = 100;
AssetPrice = [90;120];
DivYield = 0.04;
Rate = 0.08;
Sigma = 0.20;

% define the RateSpec and StockSpec
StockSpec = stockspec(Sigma, AssetPrice, {'continuous'}, DivYield);

RateSpec = intenvset('ValuationDate', Settle, 'StartDates', Settle,...
'EndDates', Maturity, 'Rates', Rate, 'Compounding', -1);

% define the option type
OptSpec = {'call'; 'put'};

Price = optstockbybjs(RateSpec, StockSpec, Settle, Maturity, OptSpec, Strike)
Price = 2×1

    0.8420
    0.1108

The first element of the Price vector represents the price of the call ($0.84); the second element represents the price of the put option ($0.11).

Input Arguments

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Interest-rate term structure (annualized and continuously compounded), specified by the RateSpec obtained from intenvset. For information on the interest-rate specification, see intenvset.

Data Types: struct

Stock specification for the underlying asset. For information on the stock specification, see stockspec.

stockspec handles several types of underlying assets. For example, for physical commodities the price is StockSpec.Asset, the volatility is StockSpec.Sigma, and the convenience yield is StockSpec.DividendAmounts.

Data Types: struct

Settlement or trade date, specified as serial date number or date character vector using a NINST-by-1 vector.

Data Types: double | char

Maturity date for option, specified as serial date number or date character vector using a NINST-by-1 vector.

Data Types: double | char

Definition of the option as 'call' or 'put', specified as a NINST-by-1 cell array of character vectors with values 'call' or 'put'.

Data Types: char | cell

Option strike price value, specified as a nonnegative NINST-by-1 vector.

Data Types: double

Output Arguments

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Expected option prices, returned as a NINST-by-1 vector.

Data Types: double

More About

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Vanilla Option

A vanilla option is a category of options that includes only the most standard components.

A vanilla option has an expiration date and straightforward strike price. American-style options and European-style options are both categorized as vanilla options.

The payoff for a vanilla option is as follows:

  • For a call: max(St−K,0)

  • For a put: max(K−St,0)

where:

St is the price of the underlying asset at time t.

K is the strike price.

For more information, see Vanilla Option.

References

[1] Bjerksund, P. and G. Stensland. “Closed-Form Approximation of American Options.” Scandinavian Journal of Management. Vol. 9, 1993, Suppl., pp. S88–S99.

[2] Bjerksund, P. and G. Stensland. “Closed Form Valuation of American Options.” Discussion paper, 2002.

Version History

Introduced in R2008b

See Also

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