To go further on Alladin’s point…
American options have potential credit risk unless holder exercises early; then it become current credit risk
Thanx. I also searched AF and got similar result, which is supported by the excerpt from Curriculum book(2009). But I can’t find this paragraph from the current curriculum. Please post the page # if you find a similar text as follows:
“The primary benefit to an American option is the ability to exercise before the expiration date. This imples the credit risk of an American option will be atleast as great as a similar European option. Also, the potential credit risk of an American option becomes current if the long decies to exercise early.”
Pg 255 just above Example 8.
If the option were American, the value could be greater. Moreover, with American options, current credit risk could arise if the option holder decides to exercise the option early. This alternative creates the possibility of the short defaulting before expiration.