- CFA Exams
- 2023 Level I
- Topic 7. Derivatives
- Learning Module 46. Basics of Derivative Pricing and Valuation
- Subject 12. American Option Pricing
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Subject 12. American Option Pricing PDF Download
American options can be exercised early. Their prices must always be no less than those of otherwise equivalent European options.C0 = Max[0, S0-X/(1+r)T] P0 = max[0, X - S0]
American call options:
American call options, however, are never exercised early unless there is a cash flow on the underlying. The extra value of an American option, if any, comes from the fact that it can be exercised immediately.
American put options:
American put options nearly always have a possibility of early exercise, so they ordinarily sell for more than their European counterparts.
Learning Outcome Statements
o. explain under which circumstances the values of European and American options differ.CFA® 2023 Level I Curriculum, Volume 5, Module 46
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