just a dump question to ask… my brian is just frozen. Why is just the european Put dicounted to today price, not the call options?
call options are also discounted
Check better…Both pay off are discounted
Because you don’t know the price of the underlying security when you have a call on the date of expiration But you do know the price that you can discount when you have a put. It’s the strike price.
I think I got it. This has some thing to do with the intrinsic value of the put option before the expiration. As we know the option price is the sum of intrinsic value and time value. Since European put option can only be exercised at expiration, the current value of the intrinsic value is determined by discounting the stick price using the risk free rate. Otherwise the option may be overpriced.