Hidden Risks and Optionalities in American Options
Abstract
We develop a practical framework for identifying and quantifying the hidden layers of risks and optionality embedded in American options by introducing stochasticity into one or more of their underlying determinants. The heuristic approach remedies the problems of conventional pricing systems, which treat some key inputs deterministically, hence systematically underestimate the flexibility and convexity inherent in early-exercise features.
Fields of Study & Subjects
Stochastic processes and financial applications
Capital Investment and Risk Analysis
Financial Markets and Investment Strategies
Publication details
- Journal / source
- arXiv (Cornell University)
- Publication date
- 15 February 2026
- Language
- EN
- Document type
- Preprint