Book 6 3PM #100

can someone explain why a stock has to pay dividends for an american option to be different than a european option? a node can still be worth more as an american option than a euro option regardless of dividends, right? any thoughts (if this is clear enough…)

I think the textbook answer is that the american option value differs only by the pv of the cash flows on the underlying security… if there are no cash flows, then the value european options and american options would be the same. However, if the option is deep in the money in the middle of the contract, there is definitely some value in being able to exercise it early. Needless to say, I got this one wrong.

so, where does that leave us tomorrow?

an american option with no dividend will never be exercised b4 expiry because it will always be more valuable to sell it…since time premium > 0 so effectively, they should have the same price as european