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After having taken a look at this question about American and European options I was under the impression that the main difference between American and European options in Black Scholes pricing was factoring in dividends. When discussing options on futures is that difference mitigated due to the lack of dividends from futures?

  • This question might be more appropriate for quant.stackexchange.com – 0xFEE1DEAD Jul 31 '17 at 17:37
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I don't think your understanding is correct. The main difference between American-style and European-style option is the timing of the right to exercise the option. In American-style options, the option can be exercised at anytime whereas it is a point-in-time for European-style options.

Models used for those scenarios are different because the time horizon that is looked at is quite different. Therefore, when you ask:

When discussing options on futures is that difference mitigated due to the lack of dividends from futures?

The answer is no, simply because that is not the core difference between both option types. One can easily think of the possibility of the price fluctuation such that at one point in time prior to maturity, the option would be in the money and the back out of the money such that it could have been profitable to exercise the American-style option before maturity. This needs to be priced in whereas it would not for European-style options.

  • I mean this strictly in terms of black scholes pricing. I know the fundamental difference between the types of options – ford prefect Jul 31 '17 at 16:04
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  1. I was under the impression that the main difference between American and European options in Black Scholes pricing was factoring in dividends.
  2. When discussing options on futures is that difference mitigated due to the lack of dividends from futures?

The Black-Scholes model is used to price European options. The lack of dividends is part of the underlying assumptions but the model can be extended to account for dividends. However, the model is still limited to European options because this isn't the main problem (see below).

The problem of finding the price of an American option is related to the optimal stopping problem of finding the time to execute the option. Since the American option can be exercised at any time before the expiration date, the Black–Scholes equation becomes an inequality. [...] In general this inequality does not have a closed form solution[.] source: Wikipedia

To value options on futures, the slightly different Black model is used:

The Black model (sometimes known as the Black-76 model) is a variant of the Black–Scholes option pricing model. Its primary applications are for pricing options on future contracts, bond options, Interest rate cap and floors, and swaptions.

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