What are American Options?
American options are the options that give the holder of the Option the right to retire before maturity. The issuance of the dividend makes American options more attractive than European options. If the dividend is large enough, the option holder may exercise the Option early. It will probably happen when the dividend amount exceeds the amount of interest forgone due to the early exercise.
Why are American Options important?
The risk managers choose between the American Options and the European Options as the available options for Hedging. Hence, it is critical to know the concepts of the American Option.