This flashcard is just one of a free flashcard set. See all flashcards!
206
6.Which of the following describes how American options can be valued using a binomial tree?
A.Check whether early exercise is optimal at all nodes where the option is in-the-money
B.Check whether early exercise is optimal at the final nodes
C.Check whether early exercise is optimal at the penultimate nodes and the final nodes
D.None of the above
A.Check whether early exercise is optimal at all nodes where the option is in-the-money
B.Check whether early exercise is optimal at the final nodes
C.Check whether early exercise is optimal at the penultimate nodes and the final nodes
D.None of the above
Answer: A
For an American option we must check whether exercising is better than not exercising at each node where the option is in the money. (It is clearly not worth exercising when the option is out of the money)
For an American option we must check whether exercising is better than not exercising at each node where the option is in the money. (It is clearly not worth exercising when the option is out of the money)
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015