Hidden Risks and Optionalities in American Options
Risk Management
2026-02-17 v1 Pricing of Securities
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.
Cite
@article{arxiv.2602.14350,
title = {Hidden Risks and Optionalities in American Options},
author = {Noura El Hassan and Bacel Maddah and Nassim N. Taleb},
journal= {arXiv preprint arXiv:2602.14350},
year = {2026}
}