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Option style

 

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The style or family of a financial option 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 or Black 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 price)
  • Quanto option (buyer exercises in different currency)
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