SAP Function RM_OPTION_PRICE_AMER_BBSR - Price of an American Standard Option per BBSR Procedure

Parameter Reference Type Length Default Optional Text
DAYS ANY A 0 Term in Days
DOMESTIC_RATE JBD11-IFR P 6 Domestic Interest in Percent (E.g. 5,8 for 5.8%)
FOREIGN_RATE JBD11-IFR P 6 Foreign Interest
I_DAYS_TO_HORIZON ANY A 0 0 X
I_DOMESTIC_FORWARD_RATE ANY A 0 X
I_VOLA F F 8 Volatility as Per Annum Percentage Rate (E.g. 11,2)
PUT_CALL C C 0 Indicator for Put or Call
SPOT F F 8 Current Rate of Underlying
STEPS I I 4 Number of Steps for the Binomial Tree (Max. 100)
STRIKE F F 8 Strike / Base Price of Option

Parameter Reference Type Length Text
E_INTRINSIC_VALUE F F 8
PRICE F F 8 Premium for Option

Exception Text
NEG_DAYS No or Negative Term
NEG_STRIKE Negative Strike (0 is Permitted)
NO_PC Neither Put nor Call
NO_VALUE
ZERO_NEG_SPOT No or Negative Rate
ZERO_NEG_STEPS No or Negative Number of Steps
ZERO_NEG_VOLA No or Negative Vola

Functionality
This function module calculates the net present value of an Americancall or put option with an iteration procedure known as BBSR.
In the last step. the Black-Scholes formula is used.
One iteration is carried out with n/2 steps and a second iteration withn steps. For this reason, choose an even number of steps.
Using the two results, the "correct" value is extrapolated (withRichardson's method).
Satisfactory results can be achieved if the number of steps is 50 ormore. We recommend you choose 100 steps.

Notes
This procedure needs the same calculation time as the procedureimplemented with function module RM_OPTION_PRICE_AMER_BIN but theaccuracy achieved is better by factor 20. For this reason, this functionmodule should be used in place of RM_OPTION_PRICE_AMER_BIN.

Further information
For a description of this method, see M. Broadie and J. Detemple(American Option Valuation, Rev. Financ. Studies, Vol. 9, No. 4 (1996),pp.1211-1250).