Answer: The binomial option valuation model only

## Explanation The correct answer is **A: The binomial option valuation model only**. **Key differences between the models:** ### Binomial Option Valuation Model - **Can value American options** because it allows for early exercise at each node - Works by building a price tree and evaluating exercise decisions at each time step - Can incorporate the possibility of early exercise when it's optimal ### Black–Scholes–Merton (BSM) Model - **Cannot value American options** directly - Assumes European-style options (no early exercise) - Closed-form solution that doesn't account for early exercise opportunities - Primarily used for European options **Why BSM doesn't work for American options:** - American options can be exercised at any time before expiration - Early exercise may be optimal when the option is deep in-the-money or when there are dividends - BSM assumes continuous trading and no early exercise **Alternative approaches for American options:** - Binomial/trinomial trees - Finite difference methods - Monte Carlo simulation with early exercise features Therefore, only the binomial model among the given choices is appropriate for valuing American options.

Author: LeetQuiz Editorial Team