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MaxwellSheffield
Topic Author
Posts: 62
Joined: December 17th, 2013, 11:08 pm

How would you price American options?

June 13th, 2018, 12:22 pm

Hello, 

This is an open question : How would you price an american option on future consistently with the smile ? 

For example, when it comes to pricing Eurodollar option, we often see the black formula used in an awkward way : 
- There is no margin process for the option, an american option should not be priced as a European.
- The future rate is not a martingale under the "T-forward measure" 
- Even if it was a European, payment occurs at the expiring date, not  "tenor"-month  later.
The american premium is not negligible , hence the need to model the future rate as well as the funding rate.
 
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Gamal
Posts: 2016
Joined: February 26th, 2004, 8:41 am

Re: How would you price American options?

June 13th, 2018, 12:59 pm

Dupire callibrated to Europeans.
 
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MaxwellSheffield
Topic Author
Posts: 62
Joined: December 17th, 2013, 11:08 pm

Re: How would you price American options?

June 13th, 2018, 1:19 pm

How about funding? 

What is European ? Option are american 
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