Option Pricing Model for American Option?

Quant Trading Strategies & Ideas
1

Dear Professor,



I am interested in the "Quantitative Approach in Futures & Options Trading" Learning Track. May I know which option pricing models covered in the track are compatible with American Options?



Besides, does the track cover the Bjerksund-Stensland Option Pricing Model? If not, which course should I take to implement one?



Thanks

2

Hi,



The courses in the learning track "Quantitative Approach in Futures & Options Trading" covers European-style option pricing model like the Black-Scholes model, etc. We do not cover any models compatible with American-style options. However, most of the index options in the US are European-style, which can be modelled using the BS model and has been covered in the courses. 



Hope this helps!



Thanks,

Akshay

3

Hi Akshay, do you know any option pricing models that are compatible with American style options? Thanks

4

Hi,



Any option pricing with early exercise, such as the American style option, is an optimal stopping problem.



https://en.wikipedia.org/wiki/Optimal_stopping



The basic pricing models are by simulation, so you can always use binomial option pricing or Monte Carlo; everything else is usually some approximation to make the pricing fast by sacrificing some accuracy (at least on some boundary conditions).



You can refer to the following links to read more about the same:



https://pdfs.semanticscholar.org/0265/a6ebb70d55845628e68df6820e98db34599d.pdf

https://finpricing.com/lib/EqAmerican.html



Longstaff and Schwartz, Finite difference and binomial are popular models. Longstaff and Schwartz is perhaps the most academically preferred. Hence, it is used by most big desks for trade pricing.



Hope this helps!



Thanks,

Akshay

 

5

Hi Akshay, Thank you very much