Bjerksund-Stensland Model
What Is the Bjerksund-Stensland Model?
The Bjerksund-Stensland model is a shut structure option pricing model used to work out the price of an American option. The Bjerksund-Stensland model rivals the Black-Scholes model, however the Black-Scholes model is specifically intended to price European options.
Figuring out the Bjerksund-Stensland Model
The Bjerksund-Stensland model was developed in 1993 by Norwegians Petter Bjerksund and Gunnar Stensland and is utilized by investors to produce an estimate for the best chance to execute an American option — monetary derivatives that give buyers the right, however not the obligation, to buy (calls) or sell (puts) an underlying asset at a settled upon price and date.
The model is utilized specifically to decide the American call value at early exercise when the price of the underlying asset arrives at a flat boundary and works for American options that have a continuous dividend, consistent dividend yield, and discrete dividends. Bjerksund-Stensland partitions the opportunity to maturity into two periods with flat exercise limits — one flat boundary for every one of the two periods.
American options contrast from European options in that they can be exercised anytime during the contract period, as opposed to just on the expiration date. This feature ought to make the premium on a American option greater than the premium on a European option since the party selling the option is presented to the risk of the option being exercised over the whole duration of the contract.
The Bjerksund-Stensland model considers that options might be exercised before the expiration date, while the well known Black Scholes Method doesn't. This means the last option isn't exactly suitable for ascertaining the price of American options and works best while pricing more clear European options.
Dissimilar to the Black Scholes model, the Bjerksund-Stensland model factors in that U.S. options might be exercised before the expiration date.
Benefits and Disadvantages of the Bjerksund-Stensland Model
The Bjerksund-Stensland model can complete complex computations all the more rapidly and productively compared to numerous other pricing methods. This was especially important in light of the fact that PCs at the hour of its beginning were less strong, and inefficient equations could dial back estimations.
However, the model isn't perfect. One flaw is that it is unable to give the most optimal exercise strategy due to the estimates that it involves in computations.
Special Considerations
Investors can utilize binomial and trinomial trees as an alternative to the Bjerksund-Stensland model. Trees are thought of "mathematical" methods, while Bjerksund-Stensland is viewed as a guess method. PCs are typically able to complete estimation computations quicker than they can complete mathematical methods.
Features
- The Bjerksund-Stensland model works for American options that have a continuous dividend, consistent dividend yield, and discrete dividends.
- The Bjerksund-Stensland model is a shut structure option pricing model used to work out the price of an American option.
- It is planned specifically to decide the American call value at early exercise when the price of the underlying asset arrives at a flat boundary.
- Investors can utilize binomial and trinomial trees, which are thought of "mathematical" methods, as an alternative to the Bjerksund-Stensland model.
- It contends with the Black-Scholes model, however the Black-Scholes model is specifically intended to price European options.
