This book proposes a closed-form solution for pricing an American put option on a non-dividend paying stock based on an optimally early-exercise strategy. An American put option should be early exercised when the maximum option premium of early exercise is not less than the value of its European counterpart; otherwise, it should not be early exercised. This paper also shows that Merton (1973)¿s formula for pricing a perpetual American put option on a non-dividend paying stock is not perfect and shows such an option¿s value is equal to its strike price.

Mr. Xiaodong Wang, MSc in financial mathematics, having rich working experiences in financial fields in China for many years.