Report on "American Option Pricing and Hedging Strategies"

TL;DR

This paper explores American option pricing and hedging strategies using a binomial model, emphasizing the differences from European options due to early exercise rights and employing a dynamic-hedging approach.

Contribution

It introduces a dynamic-hedging method tailored for American options within the binomial model framework, highlighting key differences from European options.

Findings

Hedging strategies are similar for American and European options but differ in early exercise considerations.

The binomial model effectively captures American option features.

Dynamic hedging is suitable for American options with early exercise rights.

Abstract

This paper mainly discusses the American option's hedging strategies via binomialmodel and the basic idea of pricing and hedging American option. Although the essential scheme of hedging is almost the same as European option, small differences may arise when simulating the process for American option holder has more rights, spelling that the option can be exercised at anytime before its maturity. Our method is dynamic-hedging method.