Barone-Adesi and Whaley value
The value provided by a method for pricing tradable call options on dividend-paying stock.
Uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, the expected standard deviation of the stock return (also know as the stock price volatility), and the yield&parent_dir=glossary>dividend yield. Developed by Giovanni Barone-Adesi and Robert E. Whaley.
The Barone-Adesi and Whaley (BAW) value can be no less than the intrinsic value and no more than the Black-Scholes value. The Black-Scholes formula overvalues options on stocks that pay dividends. When choosing to hold an option unexercised, the option holder delays payment of the exercise price, but forgoes the opportunity to receive any dividends. When the BAW value equals the intrinsic value, the implication is that the expected value from continuing to hold option is no more than the value from exercising. This cannot be the case for stocks that pay no dividends, but this situation does sometimes arise for stocks that pay dividends. Essentially, the BAW value equals the intrinsic value when the present value of dividends forgone by holding the unexercised option equals or exceeds the present value of deferring payment of the exercise price until the expiration of the option.
See Giovanni Barone-Adesi and Robert E. Whaley, 1987, Efficient analytic approximation of American option values, Journal of Finance 42, 301--320.