DEFINITION of 'BaroneAdesi And Whaley Model'
A quadratic approximation method for pricing exchangetraded American call and put options on commodities and commodity futures. The Barone Adesi & Whaley Model was published in the Journal of Finance in 1987 and is based on the BlackScholes model and the Merton model. It uses an underlying asset and carrying cost rate as its key inputs. In addition to options on commodities and commodity futures, the model can also be used to price foreign currency options, precious metals, longterm debt instruments with continuous coupon yields and stock indexes with continuous dividend yields.
BREAKING DOWN 'BaroneAdesi And Whaley Model'
Before Giovanni BaroneAdesi and Robert Whaley developed this American option pricing model, investors typically used finitedifference, binomial or compoundoption approximation methods, which provide similar results but are more difficult and expensive to use. The BaroneAdesi and Whaley Model has the advantages of being fast, accurate and inexpensive to use. It is most accurate for options that will expire in less than one year.

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