American Derivatives: Pricing and Hedging

This lecture covers American derivatives, focusing on the pricing and hedging strategies involved. It explains the concept of American derivatives as adapted processes with pay-offs based on exercise decisions. The lecture delves into binomial examples, European valuation, and backward induction techniques. It discusses American recursion, stopping times, and optimal stopping rules. The lecture also explores hedging strategies for American put options, emphasizing the importance of replicating strategies for European derivatives. The concept of trading and consumption strategies in the context of American replication is also discussed.