Option Q

Just a quick question… I know an american put is worth at least as much as a european put because of the time value of money on the european’s exercise price. But for calls, are american and european lower bound of call prices the same? They’re both calculated as the underlying minus the PV of the exercise… the only difference is that this is the lowest bound for an american which can be sold whenever but is a law for the european?? Hope that didn’t sound too confusing, any help would be appreciated

If you could re-word that a bit… And are you talking about the time value of the option in the first part, or the actual TVM?

Reggie Wrote: ------------------------------------------------------- > Just a quick question… > > I know an american put is worth at least as much > as a european put because of the time value of > money on the european’s exercise price. > > But for calls, are american and european lower > bound of call prices the same? Yes, and unless there are dividends they are worth the same. It’s rare that you want to exercise an American call early. > They’re both > calculated as the underlying minus the PV of the > exercise… the only difference is that this is the > lowest bound for an american which can be sold > whenever but is a law for the european?? > > Hope that didn’t sound too confusing, any help > would be appreciated

Agree with above. Usually American and European call options will be priced the same, but in the instance of something like a dividend being paid out, this would cause the option value to drop by more than the remaining time value of holding it which would give the American option the higher value. At the very least, an American option (both puts and calls) is always worth at least as much as a European option.

Thanks a lot for your help guys