2. Different prices: Other things being equal, American options are more expensive than European options, which is caused by the more flexible exercise of American options.
3. Different pricing methods: There are two options pricing methods, namely binary tree pricing model and BS pricing model. American options are priced by the former, while European options are priced by the latter.
1. Overview of European options
In terms of options, there are usually three foreign exchange options in the world: American options, European options and Bermuda options.
European option: refers to the option that the buyer must exercise on the option expiration date. In Asian financial markets, it is stipulated that the time for exercising options is 14: 00 pm Beijing time on the expiration date of options. After this time, no matter how valuable the option is, it will automatically expire.
For example, customers expect EUR/USD to rise gradually from 1. 1500 to 1. 1700 within two weeks. So he also bought a European option with a face value of 654.38+ million euros for two weeks. The exercise price was 1. 1.500, and the option fee was only 0.65% (that is, 650 euros was paid). However, the European option cannot be exercised before the expiration date of 14: 00 pm Beijing time. You can't exercise it at will like American options. Assuming the option expires at 1. 1700, the customer can make a profit of 1252.50 USD (2000-650x1.1500 =1252.50).
2. Definition of American option
American options refer to options that can be exercised on any day after trading. In other words, the option holder can choose to execute or not to execute the option contract before 9: 30am new york time on any working day before the option expires. American options allow option holders to exercise the right to buy (if it is a call option) or sell (if it is a put option) the underlying assets on or before the expiration date.
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In terms of options, there are usually two foreign exchange options in the world: American options and European options.
American options refer to options that can be exercised on any day after trading, which are mostly adopted by floor exchanges.
For example, the spot exchange rate of EUR/USD this morning was 1. 1500, and a customer predicted that the exchange rate of EUR might rise to 1. 1600 or higher in the evening or tomorrow. So he bought an American option with a face value of 65,438+million euros from the bank for two weeks, the exercise price was 1. 1.500 euros, and the rate was set at 2.5% (that is, it would cost 2,500 euros to buy the option). The next day, the exchange rate of Euro/USD rose, and broke through 1. 1500, reaching the level of 1. 1700. Then, the customer can request to exercise the option immediately (1.1700-1.1500 = 200) and make a profit of 200 points, that is, $2,000. However, after deducting the expenses paid when purchasing the option, the customer still lost $875 (2000-2500×1.1500 =-875). It can be seen that although American options are more flexible and convenient, the expenses of option fees are very expensive.