Barone-Adessi and Whaley Model – Definition

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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.

A Little More on What is Barone-Adesi And Whaley Model

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.

References for Barone-Adesi and Whaley Model

Efficient analytic approximation of American option values, BaroneAdesi, G., & Whaley, R. E. (1987). The Journal of Finance, 42(2), 301-320.

An approximation of American option prices in a jump-diffusion model, Mulinacci, S. (1996). Stochastic processes and their applications, 62(1), 1-17.

Pricing American currency options in an exponential Lévy model, Chesney, M., & Jeanblanc, M. (2004). Applied Mathematical Finance, 11(3), 207-225.

Option pricing under a double exponential jump diffusion model, Kou, S. G., & Wang, H. (2004). Management science, 50(9), 1178-1192.

Pricing American options under the constant elasticity of variance model: An extension of the method by BaroneAdesi and Whaley, Ballestra, L. V., & Cecere, L. (2015). Finance Research Letters, 14, 45-55.

Empirical tests of valuation models for options on t‐note and t‐bond futures, Cakici, N., Chatterjee, S., & Wolf, A. (1993). Journal of Futures Markets, 13(1), 1-13.

A generalization of the BaroneAdesi and Whaley approach for the analytic approximation of American options, Guo, J. H., Hung, M. W., & So, L. C. (2009). Journal of Futures Markets: Futures, Options, and Other Derivative Products, 29(5), 478-493.

Pricing American currency options in a jump diffusion model, Chesney, M., & Jeanblanc, M. (2003).

Top management compensation and shareholder returns: unravelling different models of the relationship, Veliyath, R. (1999). Journal of Management Studies, 36(1), 123-143.

Forecasting volatility in commodity markets, Kroner, K. F., Kneafsey, K. P., & Claessens, S. (1995). Journal of Forecasting, 14(2), 77-95.

Option Pricing With VG Martingale Components1, Madan, D. B., & Milne, F. (1991). Mathematical finance, 1(4), 39-55.