How Does the Black-Scholes Model Account for the Early Exercise Feature of American Options?

The original Black-Scholes model cannot accurately price American options because it assumes exercise only at expiration. The model must be adapted or replaced with numerical methods to account for the early exercise feature.

The most common methods are the Binomial Tree or Monte Carlo simulations, which model the underlying price path over time and check for optimal early exercise points. This makes the valuation process computationally intensive.