SAN-LIN CHUNGShackleton, MarkMarkShackleton2019-07-222019-07-22200313504851https://scholars.lib.ntu.edu.tw/handle/123456789/414513The American early exercise feature of the Real Option to invest in a new project is important in capital budgeting and project valuation. Closed form solutions for American, and therefore Real, Options are known for two special cases; an infinite horizon generates the Merton (Bell Journal of Economics, 4, 141-83, 1973) solution while a zero dividend yield on the project generates Black-Scholes (Journal of Political Economy, 81, 637-59, 1973) prices since early exercise is never optimal. Geske-Johnson (Journal of Finance, 39, 1511-24, 1984) approximation is extended to a bivariate case by assuming various forms of separability for option prices as a function of time to maturity and yield to produce fully explicit and asymptotically correct approximations. These methods are compared with another simple approximation method due to Barone-Adesi and Whaley (Journal of Finance, 42, 301-20, 1987) and MacMillan (Advances in Futures Options and Research, 2, 117-42, 1987) and the estimated error these expressions contain compared to an accurate numerical benchmark technique.journal article10.1080/13504850320001389802-s2.0-0344552372https://www.scopus.com/inward/record.uri?eid=2-s2.0-0344552372&doi=10.1080%2f1350485032000138980&partnerID=40&md5=6de3dc15a2122d341e27bc731727c526