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European Option


A European option is an option that may be exercised only at a fixed expiration time T. If its payoff is g(S_T), then under constant interest rate r its time-t value in a standard frictionless market is the discounted conditional expectation

 V_t=e^(-r(T-t))E^Q[g(S_T)|F_t],

where Q is a valuation probability and (F_t) is a filtration. The fixed exercise time distinguishes a European option from an American option, whose exercise time is itself chosen by the holder.


See also

American Option, Black-Scholes Theory, Call Option, Option, Put Option

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References

Black, F. and Scholes, M. S. "The Pricing of Options and Corporate Liabilities." J. Political Econ. 81, 637-654, 1973. https://doi.org/10.1086/260062.Shreve, S. E. Stochastic Calculus for Finance II: Continuous-Time Models. New York: Springer-Verlag, 2004.

Cite this as:

Weisstein, Eric W. "European Option." From MathWorld--A Wolfram Resource. https://mathworld.wolfram.com/EuropeanOption.html

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