Bjerksund-Stensland Model

The Bjerksund-Stensland model (developed by two Norwegians who are smarter than you are) is the American version of the European Black-Scholes model, which is used to calculate the price of American options.

The Black-Scholes model already existed to price European options, but American options are a bit different. Americans, being the rebels they are (see: Great Britain) have options that can be exercised at any time during the contract, not just after the contract expires. This makes it riskier for a seller of an American option over a European option, since there’s uncertainty there during the contract.

That makes a European option akin to a boring tea time, and an American option akin to riding a bull (yee-haw!). The Bjerksund-Stensland Model helps to price American options by taking this uncertainty into account.