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European-style Option

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A European-style option is an option that may be exercised only at expiration, or maturity. The European-style option is less difficult to price than otherwise identical American-style option because the later, unlike the European-style option, can be exercised before maturity. Consequently, the corresponding American option may have no analytic formula even when one exists for the European-style option. This exercise flexibility, however, has made the European-style option less popular, despite the fact that American-style options are not always exercised prior to maturity. An example of a European-style option with an analytic solution that does not exist for the American-style option is the loopback option. The payoff to a loopback option depends on the maximum or minimum price reached by the underlying asset during the period until expiration. A European-style option can be traded on an American exchange, and vice versa. The first European-style option contracts had publicly traded stocks as the underlying asset.



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