About Lesson
a. As we know that European options are the options that are exercised on the last day of its expiration day. Whereas, American options are the ones that can be exercised at any time during its tenor.
b. Since the American options give more flexibility in terms of exercisability, they usually have a higher value than the European options.
c. The upper and the lower bound on American and European options are:
|
CE |
CA |
PE |
PA |
Upper Bound |
≤ S0 |
≤ S0 |
≤ X / (1+r)T |
≤ X |
Lower Bound |
≥ S0 – [X / (1+r)T ] |
≥ S0 – X |
≥ [X / (1+r)T ] – S0 |
≥ X – S0 |
d. If the underlying assets pay any cash flow during the tenor of the bond it is beneficial to exercise the call option.