Binomial tree — American vs. European calculator
What the right to exercise early is actually worth.
Interactive: binomial tree — American vs. EuropeanHard
The same option priced two ways in one tree: once assuming you must wait for expiry, once allowing exercise at every step. The difference is what the American right is worth, and for a call on a non-dividend payer it should be almost nothing.
- European value
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- American value
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- Early-exercise premium
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- Closed form
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- Tree vs. formula
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- Reading
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Switch to a call and the early-exercise premium collapses to zero — exercising a call early throws away time value and the interest on the strike, so it is never optimal without a dividend. For the put it is a real number, because exercising releases cash that can earn interest. Drop the step count to 10 and watch the tree drift away from the closed form: that gap is discretisation error, not a modelling disagreement.
The idea behind it
This calculator belongs to Equity Derivatives, where the mechanism it computes is explained step by step, with the formula, what each input means and where the simple model stops being right. Everything is computed in your browser; nothing you type is sent anywhere.
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