Chapter 7: Problem 2
Consider American vanilla call and put options, with prices \(C\) and \(P\). Derive the following inequalities (the second part of the last inequality is the version of put-call parity result appropriate for American options): $$\begin{gathered} P \geq \max (E-S, 0), \quad C \geq S-E e^{-r(T-t)} \\ S-E \leq C-P \leq S-E e^{-r(T-t)} \end{gathered}$$ Also show that, without dividends, it is never optimal to exercise an American call option.
Short Answer
Step by step solution
Key Concepts
These are the key concepts you need to understand to accurately answer the question.