Question

While there are specific cases in which American and European op- tions with the same features (i.e. the same underlying, maturity and strike) have the same premia, explain why, in general, one might ex- pect American option premia to be greater than those for similar Eu- ropean options. [Write no more than 15 sentences in your answer.]

Answer 1

American options are those options which can be exercised before the maturity.

On the other hand European options can only be exercised at the maturity.

Since the time is longer in European options, so discounting the price of the option will always be lower than of American options.

In case of american options as it can be exercised before then the time value of option is higher due to less time of discounting as compared to European option.

Talking in general the value of American options is valued higher than European options Because it gives the advantages to the buyer to exercise it early.