How Does the Black-Scholes Model for Option Pricing Handle the Early Exercise Feature of American Options? ▴ Learn

How Does the Black-Scholes Model for Option Pricing Handle the Early Exercise Feature of American Options?

The original Black-Scholes model is designed only for European options, as it assumes no early exercise. To price American options, modified models or numerical methods, such as binomial or trinomial trees, are typically used.

These models discretize time and allow for the possibility of early exercise at each step, making them more suitable for valuing the American-style contract's additional flexibility.

What Is the Primary Method Used to Price American Options Given the Early Exercise Feature?

Why Is the Binomial Option Pricing Model Often Used for American Options Instead of Black-Scholes?

How Does the Early Exercise Feature Complicate the Pricing of American Options?

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