I am not sure why American options are more expensive for futures but the American and European are the same price for forwards. Schweser (265 book 5) says that it is due to being able to realise the MTM on the Future - but it you excersise a foward option you would realize any gain also?
because foward does not mark to the market. so the gain will not be realized for american options. but since future will be marked to the market every day, so the gain/loss will be realized. thus american options are more advantageous than european.
It was an essay question on 2003 (?) exam that I graded. Easy 3 points if you just said “American option and European option on forward have same price because the forward can’t be exrecised until its expiration date” or similar.
sorry, I am obviously missing something as my (obviously flawed) logic has them the other way around. Futures have to be mark-to-market daily, =>so there will be no unrealized gain =>thus an american option should not carry any additional value Also, if you hold an american option on a forward doesn’t that give you the right to realise any gains on the option whenever the holder of the option chooses? (and potentially invest them else where?)
my understanding of an american option on a forward, is that you have the right to exercise the option at any time, which then allows you to participate in the forward agreement, but you won’t actually realize any gain (that could be invested elsewhere) until the settlement of the forward contract. So since you can only exercise the european option on the settlement day as well, the american and european options on a forward should be equal in value.
and yes, despite my horribly worded explanation above ^^, English is my native language.
Thanks ilvino - that makes sense now.
No problem Wa.