How Does the Difference Affect the Valuation Models Used for Each Type?

European options are valued using relatively straightforward closed-form solutions like the Black-Scholes model because the exercise decision is only considered at expiration. American options, due to the possibility of early exercise, require more complex valuation methods.

These often involve numerical techniques, such as the Binomial Option Pricing Model or Monte Carlo simulations, to account for the optimal exercise decision at every point in time before expiration.