What is the 'Barone-Adesi And Whaley Model'

The Barone-Adesi and Whaley Model is a method for pricing exchange-traded American options, using quadratic approximation. Quadratic approximation is an extension of linear approximation. The Barone Adesi & Whaley Model is based on the Black-Scholes model and the Merton model. It uses an underlying asset and carrying cost rate as its key inputs. The model can be used to options on currencies, 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.

The Black-Scholes Model is appropriate for European options, that is, options that may be exercised only on the expiration date. The Barone-Adesi and Whaley Model is designed for American options, which are options that may be exercised at any time before they expire. The Barone-Adesi and Whaley Model takes the value computed by the Black-Scholes Model and adds the value of the early exercise option that is available on American options.

RELATED TERMS
  1. Option Pricing Theory

    An option pricing theory is any model or theory-based approach ...
  2. American Option

    An American option is an option that can be exercised anytime ...
  3. Merton Model

    The Merton model is an analysis tool used to evaluate the credit ...
  4. Binomial Option Pricing Model

    An options valuation method developed by Cox, et al, in 1979. ...
  5. Bjerksund-Stensland Model

    Bjerksund-Stensland model is a closed-form option pricing model ...
  6. Early Exercise

    Early exercise is the process of buying or selling shares under ...
Related Articles
  1. Trading

    Circumventing the Limitations of Black-Scholes

    Learn the ways to get around the flaws in trading models like Black-Scholes.
  2. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  3. Trading

    Getting acquainted with options trading

    Learn about trading stock options, including some basic options trading terminology.
  4. Trading

    Give Yourself More Options With Weekly and Quarterly Options

    Weekly and quarterly options were introduced to give a greater choice of option expirations to investors, and enable them to trade more efficiently.
  5. Trading

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  6. Trading

    Factors That Determine Option Pricing

    A thorough understanding of factors that affect price is essential in options trading.
RELATED FAQS
  1. Can an option be exercised on the expiration date?

    American options can be exercised up to and including the expiration date but European options can only be exercised on the ... Read Answer >>
  2. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center