What Is the Bjerksund-Stensland Model?

The Bjerksund-Stensland model is a closed-form option pricing model used to calculate the price of an American option. The Bjerksund-Stensland model competes with the 澳洲幸运5官方开奖结果体彩网:Black-Scholes model, though the Black-Scholes model is specifical💖ly designed to price European options.

Understanding the Bjerksund-Stensland Model

The Bjerksund-Stensland model was developed in 1993 by Norwegians Petter Bjerksund and Gunnar Stensland and is used by investors to generate an estimate for the best time to execute an American option—financial derivatives that give buyers the right, but not the obligation, to buy (calls) or sell (puts) an underlying asset at🐷 an agreed-upoඣn price and date.

The model is used specifically to determine the American 澳洲幸运5官方开奖结果体彩网:call value at early exercise when the price of the underlying asset reaches a flat boundary and works for American options that have a continuous dividend, constant 澳洲幸运5官方开奖结果体彩网:dividend yield, and discrete dividends. Bjerksund-Stensland divides the time to maturity into two periods with flat exercise boundar🍃ies — one flat boundary for each of𒆙 the two periods.

American options differ from European options in that they can be exercised at any point during the contract period, rather than only on the expiration date. This feature should make the premium on an 澳洲幸运5官方开奖结果体彩网:American option greater than the premium on a 澳洲幸运5官方开奖结果体彩网:European option since the party selling the option is exposed to the risk of the option being exercised over the entire duration of﷽ the contract.

The Bjerksund-Stensland model takes into account that options may be exercised before the 澳洲幸运5官方开奖结果体彩网:expiration date, while the popular Black Scholes Method does not. This means the latter isn't really suitable for calculating the price of American options aౠnd works best when pricing more straightforward European options.

Advantages and Disadvantages of the Bjerksu🎐nd-Stensland Model

The Bjerksund-Stensland model is able to complete complex calculations more quickly and efficiently compared to many other pricing methods. This was especially 𒁏important because computers at the time of its inception were less powerful, and inefficient formulas could slow down calculations.

The model isn't perfect though. One flaw is that it is unable to provide the most optimal exercise st🧸rategy due to the estimates that it uses in cal📖culations.

Special Considerations

Investors can use binomial and 澳洲幸运5官方开奖结果体彩网:trinomial trees as an alternative to the Bjerksund-Stensland model. Trees are considered “numerical” methods, whereas Bjerksund-Stensland is considered an approximation method. Computers are typically able to complete approximation calculations fast❀er than th🐻ey can complete numerical methods.

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