What Is the Difference Between Valuing an American and a European

question 6

Multiple Choice

What is the difference between valuing an American and a European option using a tree?

• A) The value of u is higher for American options
• B) The value of u is lower for American options
• C) The time steps for American options are not equal
• D) It is necessary to do two calculations at nodes where the option is in the money

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Definitions:

Buying And Selling

The basic actions of purchasing an asset and then selling it, fundamental processes in any market.

Operating Lease

A lease agreement allowing the use of an asset but does not convey rights of ownership of the asset.

Relatively Short

The term "relatively short" refers to a period of time that is short in comparison to other relevant timeframes or expectations.

Technological Changes

The overall process of invention, innovation, and diffusion of technology or processes.