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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.

American call options:

C0 = Max[0, S0-X/(1+r)T]

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:

P0 = max[0, X - S0]

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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