Hidden Optionalities in American Options

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.

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Publication Details

Journal
Risks
Published
2026-04-14
DOI
https://doi.org/10.3390/risks14040089
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
0.00
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article

Hidden Optionalities in American Options

Bacel Maddah, Nassim Nicholas Taleb, Noura El Hassan
Risks
Stochastic processes and financial applications
article

Hidden Optionalities in American Options

Bacel Maddah, Nassim Nicholas Taleb, Noura El Hassan
article en

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.

RisksVol. 14(4)
Bay Institute (US), Mediterranean Institute of Management (CY), American University of Beirut (LB)
Openalex Percentile: Top 20%
Stochastic processes and financial applications
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