American derivatives : a review

Abstract

The paper gives an overview over the theory of pricing and hedging financial derivatives that can be exercised at any time during a fixed time interval [0, T]. The analysis makes use of the theory of optimal stopping, and as such it constitutes an interesting application of probability theory to the theory of financial economics.

In this paper we concentrate on the main principles involved only, which means, for example, that we abstract from derivatives where the underlying asset pays out dividends.