VXEEM, Variance Strike from American options?!

foxkingdom · September 4th, 2014, 11:26 am

I just spotted on the CBOE website that they use the VIX methodology to calculate the VXEEM (VIX equivalent for Emerging Market ETF). I know that the options on those ETFs are American style instead of European style. Does the Var replication formula still hold in this case? confused by the methodology.Btw, is there a way to calculate Early Exercise premium of Am Option? Is the CRR model the only way?

Alan · September 4th, 2014, 5:25 pm

I assume you refer to Variance Swap replication. In theory, you're right; the replication argument refers to euro-styles. More theoretically correct would be to first estimate what the euro-style otm option values would be (yes, probably using CRR), and then apply the VIX methodology to those.In practice, it likely makes little difference, but you could always try the `more correct' method if you're worried.