Hi, I am confused in the min and max values of the options. For EU Call Option : Min = S-X/(1+r)^t [Make sense as you can’t exercise EU options before expiry. Need to take present value of Strike price in the account] Max = S [Easy to Understand. No one will pay more for option than the price of underlying] For AM Call Option : Min = S-X/(1+r)^t [Why ???Why???Why??? . I can exercise AM call just now. So why the hell should I care about PV of X. Can’t it be simple S-X???] Max = S [Same reason as AM call] For EU Put Option : Min = X/(1+r)^t-S [Make sense as you can’t exercise EU options before expiry. Need to take present value of Strike price in the account] Max = X/(1+r)^t [Not sure but assuming…It should be PV of X] For AM Put Option : Min = X/(1+r)^t-S [Same bloody old argument… Can’t I have X-S … Simple and Sweet???] Max = X [No one is going to pay more than Exercise price] Please help me out…
patel.kartikv Wrote: ------------------------------------------------------- > Hi, > I am confused in the min and max values of the > options. > > For EU Call Option : > > Min = S-X/(1+r)^t [Make sense as you can’t > exercise EU options before expiry. Need to take > present value of Strike price in the account] > > Max = S > > For AM Call Option : > > Min = S-X/(1+r)^t [Why ???Why???Why??? . I > can exercise AM call just now. So why the hell > should I care about PV of X. Can’t it be simple > S-X???] Because AM Call is worth at least as much as European call so the lower bound needs to be at least as high as the lower bound for European. Note S-X/(1+r)^t > S-X > > Max = S > > For EU Put Option : > > Min = X/(1+r)^t-S [Make sense as you can’t > exercise EU options before expiry. Need to take > present value of Strike price in the account] > > Max = X/(1+r)^t [Not sure but assuming…It > should be PV of X] > > > For AM Put Option : > > Min = X/(1+r)^t-S [Same bloody old argument… > Can’t I have X-S … Simple and Sweet???] > But for this one, the bound is X - S. Where did you see the discounted one? > Max = X [No one is going to pay more than > Exercise price] > > > Please help me out…
Thanks JoeyDVivre. I think I got you. So what you are saying , at any point of time AM option should cost more than its counter part EU options due to facility of exercising AM options any time during life of the contract which is lacking in EU options, make sense. But do you really think that this is the only reason ??? Trying to get any other reason for this. If it exists. And for AM Put Min value, You are correct. It is X-S and not discounted one.
I don’t know about only reason, but it’s the big one.