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:

Accumulation

The process of materials or energies gathering together over time, often resulting in a gradual increase in amount or the formation of a new structure.

Air Temperatures

The measure of how hot or cold the air is, typically reported in degrees Celsius or Fahrenheit, a fundamental aspect of weather and climate.

Plucking

The removal of pieces of rock by a glacier.

Abrasion

The process of wearing down or rubbing away materials through mechanical action, often seen in geological contexts.