American Options pricing

[mkheidzedavid]

General question: Is there an only way to price an American Option?

 

[Tsotne]

Is there an only way to price an American Option?

You could have stated which only way you mean. Yeah Binomial option pricing method is used for pricing American options. Black-Sholes cannot price American option since it has not stated T time to expiration.

 

[weiwern]

Well I guess a general answer is no. Different numerical methods exist to price american options or other type of exotic options. Commonly used methods include FD or MC.

 

[HyperVolatility]

there are different techniques that can be used to price an American-style option. However, a binomial or a trinomial tree will work quite efficiently if you allow the model for at least 30-40 steps (depending on the expiry date).
There are thousands of suggested models to price such options, however, bear in mind that if you get the volatility right it is not really important which model you are using.
Go for the tree approach

 

[weiwern]

There are thousands of suggested models to price such options, however, bear in mind that if you get the volatility right it is not really important which model you are using.

Ahh, but isn't that the crux of the problem? =P

 

[HyperVolatility]

"Ahh, but isn't that the crux of the problem? =P"

Of course it is but it seems you missed the "GO FOR THE TREE APPROACH" part

:D

 

[Amber Roxanna]

Interesting question....i think i know the answer but, what if the American Option has a European girlfriend ? you can't price the couple the same way! Please clarify your question !

 

[Tsotne]

Interesting question....i think i know the answer but, what if the American Option has a European girlfriend ? you can't price the couple the same way! Please clarify your question !

I can find numerical method capable of pricing both simultaneously but I think you meant the European underlying having already been priced by BS and we can't extend the conditional principal on American one?

 

[JamesQuantResearch]

How do I calculate the implied volatility for an American Option with discrete dividends? I have already calculated the option price using binomial tree and I also have all the greeks, I am just missing the IV.