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Quantitative Finance by Matt Davison

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Chapter 28

American Options

28.1 CHAPTER SUMMARY

This chapter discusses the equations for valuing American options. Unlike European options, which the holder can only exercise at maturity, the American option gives the holder the right to exercise prior to and including the maturity date. Like we did for European options, we begin this chapter in Section 28.2 with a discussion of using binomial trees to price the option. This builds some useful intuition about the problem. We then move to continuous time.

In Section 28.3, we show that American puts are worth strictly more than otherwise similar European puts. A moving boundary PDE problem is derived for this problem—in fact, no closed-form solution of this PDE has yet been found. We also discuss ...

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