DEFINITION of 'Barone-Adesi And Whaley Model'
A quadratic approximation method for pricing exchange-traded 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 Black-Scholes 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, long-term debt instruments with continuous coupon yields and stock indexes with continuous dividend yields.
BREAKING DOWN 'Barone-Adesi And Whaley Model'
Before Giovanni Barone-Adesi and Robert Whaley developed this American option pricing model, investors typically used finite-difference, binomial or compound-option approximation methods, which provide similar results but are more difficult and expensive to use. The Barone-Adesi 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.