Why do you sometimes divide the excercise price by X? And what is the logic behind using it for American and European options?
I think you mean divide the exercise price by (1 + Rf) ^T. Check out the video by elan guides on options. They do a wonderful job on this and put call parity. The early part of the video is a little basic so you might want to skip it.
Yes, sorry. Why do you sometimes divide the excercise price by (1 + RFR)^T? And what is the logic behind using it for American and European options?
The exercise price is a future value, and it is the present value that matters (since the price of the underlying is also a present value). That’s why the exercise price needs to be discounted.
@gazhoo. and it needs to be discounted with the remaining time, that is why the exponent equals T. Daniel. www.lambert-shop.net
watched that elan guide video last night, everyone should check it out. It gives a great explanation of put-call parity
Ok. So why don’t you discount the American put Max/Min X by (1+RFR)^T?
Some of the explanations on this thread are not EXACTLY correct. I suggest you all check out the Elan Guides video.
Can anyone else help with this?
He seems to have filtered out words containing “elan” or “video”. gazhoo, easiest way. American can be exercised any time, hence you do no need to discount the strike price at expiration. Hard but more valuable way. Look at the elan guide video that beatthecfa recommended above.
In american put option whenever the price is lower than the strike price it can be exercised immediately. the option buyer need not to wait till the maturity of the option. he will get the money immediately on exercising the option. so no need to calculate the present value of future cash flows or discounting it. whereas in europeon put option, the option buyer has to wait till the maturity of the option and can not get the money immediately if the option is in the money. thats why the value is discounted in europeon put options to calculate the present value of the future income.