Barone-Adessi and Whaley Model - Explained
What is the Barone-Adessi and Whaley Model?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is the Barone-Adesi And Whaley Model?
The Barone-Adesi and Whaley Model is a formula for pricing and estimating exchange-traded American options. This model is regarded as an efficient analytic approximation of the American values. The Barone-Adesi and Whaley Model uses the quadratic approximation method in estimating the value of American Options. This model is applicable pin estimating options on precious metals, currencies and long-term instruments. This method is used primarily for equities, it calculates the value of an exercise option to the value presented by the Black-Scholes option pricing technique. Black-Scholes model and Merton Model are important models that the Barone-Adesi and Whaley Model is based on.
How Does the Barone-Adesi And Whaley Model Work?
The Barone-Adesi and Whaley Model was developed by two experts, Giovanni Barone-Adesi and Robert Whaley. Before the model was developed, there were other methods used by investors in estimation or approximation of American options. Unlike other American Option Pricing Models, the Barone-Adesi and Whaley Model is reputable for being efficient, reliable, accurate and affordable. As an American Option Pricing Model, this model was originally designed for the approximations of American options but it is also accurate for European options. It is an underlying model for options that can be exercised at any time before their expiration date. Using the computation by Black-Scholes Model, the values of early exercise options available on American options are added to the computed value.