Hii... The minimum value of American option cannot be less than the minimum value of European options because American options have an additional advantage that they can be exercised at any time. Also, the minimum value of American Call option is given by Max(S - X, 0) because it can be exercised anRead more
Hii…
The minimum value of American option cannot be less than the minimum value of European options because American options have an additional advantage that they can be exercised at any time.
Also, the minimum value of American Call option is given by Max(S – X, 0) because it can be exercised anytime.
Whereas the minimum value of European Call option is Max(S – PV of X, 0) as it is to be exercised on expiry
As we take PV of X, the minimum value of European option is higher than Max(S – X,0) because PV of X is less than X
Considering that value of American option cannot be less than European option, its value is taken as Max(S – PV of X, 0).
The IV of both American and European Call option is Max(S-X,0)
Derivatives
Hii... The minimum value of American option cannot be less than the minimum value of European options because American options have an additional advantage that they can be exercised at any time. Also, the minimum value of American Call option is given by Max(S - X, 0) because it can be exercised anRead more
Hii…
The minimum value of American option cannot be less than the minimum value of European options because American options have an additional advantage that they can be exercised at any time.
Also, the minimum value of American Call option is given by Max(S – X, 0) because it can be exercised anytime.
Whereas the minimum value of European Call option is Max(S – PV of X, 0) as it is to be exercised on expiry
As we take PV of X, the minimum value of European option is higher than Max(S – X,0) because PV of X is less than X
Considering that value of American option cannot be less than European option, its value is taken as Max(S – PV of X, 0).
The IV of both American and European Call option is Max(S-X,0)
Hope this helps
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