option's

vandana.jain
Finance Junkie
Posts: 41
Joined: Tue Jul 24, 2012 4:56 pm

option's

Postby vandana.jain » Fri Oct 26, 2012 12:21 pm

Consider the following statements about American options and choose the one which is not correct.
Choose one answer.
a. American call options are always worth greater than or equal to European call options. Incorrect
b. American call options can be priced using the put-call parity. Correct
c. American call options can be priced with binomial trees. Incorrect
d. American call options can be exercised on or before the expiration date. Incorrect


please explain why 1st is incorrect, as we assume that in absence of dividend EUROPEAN call option and American Call option price is same....

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: option's

Postby content.pristine » Fri Oct 26, 2012 1:52 pm

What you are referring is the lower bounds or the minimum values of American and European Options are the same. However, in general, American Options are priced higher due to the additional benefit of exercising it any time before expiry.

8-)

kapilanjan.npti
Posts: 2
Joined: Fri Oct 26, 2012 8:59 pm

Re: option's

Postby kapilanjan.npti » Fri Oct 26, 2012 9:00 pm

I think c and d are also correct :?:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: option's

Postby content.pristine » Sat Oct 27, 2012 4:25 pm

The question asks, which of the following is incorrect.
So that would imply that C and D are correct 8-)


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