Question

Asked Nov 11, 2019

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2c) Give an example to show that the American put can be worth more than the European put, that is, where immediate exercise of the American gives payout at times T strictly greater than the payout of the European. Hint: Exercising early means the strike price K will be received early.

Step 1

The put option for both American and European options are as follows:

Step 2

It is proved from the above two put options is that if

Step 3

Then buy an American put option and exercise it immediately, yielding, then, the total cash f...

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