On the value of being American [article]

David Hobson, Anthony Neuberger
2016 arXiv   pre-print
The virtue of an American option is that it can be exercised at any time. This right is particularly valuable when there is model uncertainty. Yet almost all the extensive literature on American options assumes away model uncertainty. This paper quantifies the potential value of this flexibility by identifying the supremum on the price of an American option when no model is imposed on the data, but rather any model is required to be consistent with a family of European call prices. The bound is
more » ... enforced by a hedging strategy involving these call options which is robust to model error.
arXiv:1604.02269v1 fatcat:i5bda5ptevcpzc3wocj3h5lurm