Using a Binomial Tree Explanation,explain the Situation in Which an American

question 7

Essay

Using a binomial tree explanation,explain the situation in which an American option would alter the pricing of an option.

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Definitions:

Dividends

Sum of money distributed by a corporation to those holding its shares, originating from the firm's earnings allocated among its stockholders.

Expense

Costs incurred by a business in the process of earning revenues, typically classified as operating or non-operating expenses.

Common Stock

A type of equity security representing ownership in a corporation, entitling the owner to vote at shareholder meetings and receive dividends.

Legal Liability

The legal responsibility to pay debts or damages, which can arise from contracts, negligence, or other legal means.