Hidden Risks and Optionalities in American Options

Noura El Hassan, Bacel Maddah and Nassim N. Taleb

Papers from arXiv.org

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.

Date: 2026-02
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