What Is the Bjerksund-Stensland Taste?
The Bjerksund-Stensland taste is a closed-form chance pricing taste used to calculate the price of an American chance. The Bjerksund-Stensland taste competes with the Black-Scholes taste, despite the fact that the Black-Scholes taste is especially designed to price Ecu possible choices.
Key Takeaways
- The Bjerksund-Stensland taste is a closed-form chance pricing taste used to calculate the price of an American chance.
- It is designed specifically to come to a decision the American title value at early exercise when the price of the underlying asset reaches a flat boundary.
- The Bjerksund-Stensland taste works for American possible choices that have a continuous dividend, constant dividend yield, and discrete dividends.
- It competes with the Black-Scholes taste, despite the fact that the Black-Scholes taste is especially designed to price Ecu possible choices.
- Patrons can use binomial and trinomial timber, which might be considered “numerical” methods, as an alternative to the Bjerksund-Stensland taste.
Understanding the Bjerksund-Stensland Taste
The Bjerksund-Stensland taste was once as soon as complicated in 1993 by the use of Norwegians Petter Bjerksund and Gunnar Stensland and is used by investors to generate an estimate for the best time to execute an American chance—financial derivatives that give buyers the best, alternatively not the obligation, to buy (calls) or advertise (puts) an underlying asset at an agreed-upon price and date.
The manner is used specifically to come to a decision the American title value at early exercise when the price of the underlying asset reaches a flat boundary and works for American possible choices that have a continuous dividend, constant dividend yield, and discrete dividends. Bjerksund-Stensland divides the time to maturity into two categories with flat exercise barriers — one flat boundary for each and every of the two categories.
American possible choices range from Ecu possible choices in that they are able to be exercised at any stage all over the contract period, moderately than best possible on the expiration date. This feature must make the highest price on an American chance greater than the highest price on a Ecu chance given that birthday party selling the selection is exposed to the danger of the selection being exercised over the entire duration of the contract.
The Bjerksund-Stensland taste takes into account that possible choices may be exercised previous than the expiration date, while the most well liked Black Scholes Means does not. This means the latter isn’t actually suitable for calculating the price of American possible choices and works best possible conceivable when pricing easier Ecu possible choices.
Against this to the Black Scholes taste, the Bjerksund-Stensland taste parts in that U.S. possible choices may be exercised previous than the expiration date.
Advantages and Disadvantages of the Bjerksund-Stensland Taste
The Bjerksund-Stensland taste is able to entire difficult calculations further briefly and effectively compared to many alternative pricing methods. This was once as soon as specifically essential because of laptop techniques at the time of its inception were a lot much less difficult, and inefficient method would possibly simply slow down calculations.
The manner isn’t best possible despite the fact that. One flaw is that it isn’t in a position to provide the most optimal exercise method as a result of the estimates that it uses in calculations.
Explicit Problems
Patrons can use binomial and trinomial timber as an alternative to the Bjerksund-Stensland taste. Trees are considered “numerical” methods, whilst Bjerksund-Stensland is considered an approximation approach. Pc techniques are in most cases ready to complete approximation calculations sooner than they are able to entire numerical methods.
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