Tuesday, October 31, 2017

American Put Versus European Put


American Put Versus European Put



Everything that can be done with a European put can be done with an American put. In addition, an American put can be exercised at any time prior to expiration.

Therefore, the American put price must at least equal the European put price, that is

                          
   Pa(S0, T, X) ≥   Pe(S0, T, X)


-

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)

3. The Binomial Option Pricing Model

Introduction This chapter examines the first of two general types of option pricing models. A model is a simplified representation of real...

  • The One-Period Binomial Model
    The One-Period Binomial Model First, let us define what we mean by a one period world. An option has a defined life. Assume the optio...
  • The Lower Bound of a European Call
    The Lower Bound of a European Call The price of a European call must be at least equal to the greater of zero or the stock price minu...
  • The Effect of Time to Expiration
    The Effect of Time to Expiration Consider two American puts, one with a time to expiration of T 1 and the other with time to expirat...