CLOSED FORM VALUATION OF AMERICAN OPTIONS PETTER BJERKSUND AND GUNNAR STENSLAND Abstract. This paper presents a simple and intuitive approximation of the American call and put value. The approximation generalizes the Bjerksund- Stensland model by dividing time to maturity into two periods, each with a ‡at early exercise boundary. By imposing a feasible but non-optimal exercise strategy, a lower bound to the true option value is obtained. Numerical in- vestigations indicate that the method represents an accurate and extremely computer e¢cient approximation to the American option value. JEL classi…cation: G13, C63. Date : October 21, 2002. We have corrected some typos in Proposition 1 and Table 2 of the April 29, 2002 version. Key words and phrases. American option, value approximation, closed form, computer e¢ciency. We thank Matthew Schaefer for comments. 1 CORE Metadata, citation and similar papers at core.ac.uk Provided by NORA - Norwegian Open Research Archives