Difference between revisions of "American versus European options"

Revision as of 18:38, 27 August 2020

American versus European options

@@ Line 1: / Line 1: @@
-An American option can be exercised at any time prior to its expiration, while a European option can be exercised only at expiration.
+American versus European options
-* The possibility of early exercise makes American options more valuable than otherwise similar European options.
-* However, in most cases, the time premium associated with the remaining life of an option makes early exercise sub-optimal.
-* While early exercise is generally not optimal, there are two exceptions:
-** One is where the underlying asset pays large dividends, thus reducing the value of the asset, and of call options on it. In these cases, call options may be exercised just before an ex-dividend date, if the time premium on the options is less than the expected decline in asset value.
-* The other is when an investor holds both the underlying asset and deep in the money puts on that asset, at a time when interest rates are high.
-The time premium on the put may be less than the potential gain from exercising the put early and earning interest on the exercise price.
 [[Category:finance]]