Barone-Adesi And Whaley Model

An American option (contract guaranteeing the right to buy or sell an asset or security) pricing model developed by Giovanni Barone-Adesi and Robert Whaley. It is utilized for pricing exchange-traded options on any number of assets, and utilizes quadratic (as opposed to linear) approximation as its methodology. Utilizing the underlying asset and carrying cost rate as its primary inputs, it is distinguished from previous methods in that it is easier and cheaper to employ, while producing similar, accurate results. It augments the characteristics of the Black-Scholes and Merton models (both European) with the uniquely American quality of the early exercise option.

For the laity, it just means a way to price contracts which guarantee the right to buy or sell an asset, which is more efficient and cost-effective than earlier models and offers more flexibility in the terms of exercising said contract.