2 period binomial tree for Option value (European vs American)

[francis]

Is there any difference between the calculation method of European and American options value for 2 period binomial tree?

 

[passme]

yes.
for european option you only need to replace the value with strike price in the year of expriration.
for american, you have to replace the value to the strike every year when necessary.

 

[francis]

I don’t understand the calculation of american option value. How to replace the value every year. Base on what condition to replace, pls help.

 

[francis]

For example, if the call value derived from 2nd period is smaller than the call value calculated from 1st period, we just simply use 1st period value and ignore the value from 2nd period, right?

 

[passme]

you are correct, you only replace value if option is in the money.