Which of the following statements regarding an option prior to expiration is COR

Question

Which of the following statements regarding an option prior to expiration is CORRECT? The minimum value of:

a European put is more than the minimum value of an American put.

an American call is equal to the minimum value of a European call.

a European put is equal to the minimum value of an American put.

an American call is more than the minimum value of a European call.

A.

a European put is more than the minimum value of an American put.

B.

an American call is equal to the minimum value of a European call.

C.

a European put is equal to the minimum value of an American put.

D.

an American call is more than the minimum value of a European call.

Explanation / Answer

Option B is Correct

Example

Calculation of minimum and maximum price of 6 month American and European calls with a strike price of 100 and currently trading at 106.Assume a risk free rate of 5%

Calculation of minimum and maximum price of 6 month American and European Put with a strike price of 105 and currently trading at 100.Assume a risk free rate of 5%

Based on the above Example an AMerican call is equal to the minimum value of European Call.

Particulars Minimum Value Maximum Value European Call ct>=Max(0,S-[X/(1+rf)^(T-t)]) ct<=St American Call Ct>=Max(0,S-[X/(1+rf)^(T-t)]) Ct<=St European Put pt>=Max(0,[X/(1+rf)^(T-t)]-S) pt<=X/(1+rf)^(T-t) American Put Pt>=Max(0,X-S) pt<=X c European Call Price C American Call Price p European Put Price P American Put Price S Spot Price X Strike Price T-t Time remaining to Maturity

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