The style or family of a financial
is a general term denoting the class into which the option falls,
usually defined by the manner in which the option may be exercised.
The two great families are european and american.
A european option may be exercised by only at the maturity of the option, i.e. at a single point in time
An american option on the other hand may be exercised
at any time before expiry. Oddly, american options are very rarely
exercised. That is because any option has a time
value and is therefore worth more unexercised. Buyers who wish
to realise the full value of their option will therefore prefer
sell it on a recognised market, either an over
the counter (OTC) or listed market.
European options are typically valued using the Black-Scholes
76 formulas. American options are more difficult to value, and
a choice of models are available (for example Whaley, binomial
options model, Monte Carlo and others).
Some other styles of options are
- Bermudan option (buyer has right of exercise at certain times
before maturity according to a pre-agreed schedule)
- Asian option (buyer exercises against average strike
- Quanto option (buyer exercises in different currency)