What is an American Option?

American Option Definition – A currency option that can be exercised by the Holder at any time before the expiration date, as opposed to a European option that may only be exercised on the actual expiration date. European currency options are easier to value since their valuation at a point in time falls within the constraints of the popular Black-Scholes pricing model. However, pricing of an American currency option is more complicated due to exercise variability. There is also no consensus on the preferred model to use to determine valuations. American options will generally have a higher value due to the flexibility of choosing an earlier exercise date. The extra value for the Seller is offset when a Forex option is deep in-the-money and the interest rate for the strike currency is lower than for the currency to be received. Exercising the currency option earlier is justified since the time value of money forfeited is less than the expected depreciation of the other currency.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.