• Black-Scholes model cannot be used to accurately price options with an American-style exercise as it calculates the option price at expiration only. Early exercise as in the case of American option cannot be priced correctly using this model which is a major limitation of this model.
  • All exchange traded equity options (ETO) have American-style exercise as against the European options which can only be exercised at expiration. That means this model cannot be used for pricing most ERO options. The exception to this is an American call on a non-dividend paying asset as the call is always worth the same as its European equivalent since there is never any advantage in exercising early.

Please enrol me for the free email course

on Basics of Accounting for Financial Instruments

Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!