Chapter 14
American Options
In this chapter we briefly present the theory for pricing early-exercise (American) options in continuous time. Recall that American options were first introduced in Chapter 4, and the discrete-time case was dealt with in Chapter 7. Let us recall some of the properties of early-exercise options. The key difference between European-style and American-style options is that a holder of an American option can exercise her rights any time before the expiration date. This additional early exercise privilege should not be worthless. Thus, an American option is expected to be worth more than its European analogue. The extra premium paid on top of the price of the European option is called the early-exercise premium. We mainly ...
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