Microsoft PowerPoint - PoF.ppt

American optionsƒ 219

Recall:

“American” options

give the right to buy or sell the underlying

asset at any time on or before a

prespecified future data (called the

expiration date);

“early exercise”

.

ƒ

This implies that we need at least

a 2-step binomial asset pricing model

to value the possibility of early exercise.Note: In a 1-step binomial asset

pricing model American and European

options will have the same value.
Derivative securities: Options - Binomial asset pricing model