We know this table will definitely be on the exam. Does someone please have a second to help me understand it? I understand how Calls/Puts work. I’m hoping it really isn’t that difficult, but having a tough time understanding the min, max, with zeros also.
THANK YOU!
Example: The greater of either zero or the PV of the exercise price minus the underlying price is most likely the lower bound on the price of an _______________
A) Euro Put option
B) American Put option
C) American Call option.
i decided it was easier to just memorize them then grasp the concept
i think it’s A) the explanation is in CFAI book as to how the formula is derived…its pretty lengthy so i aint writting it here(its slightly similar to how put call parity is derived)
Well . . . exercise price minus underlying price tells you that it’s a put option; a call option’s value is a function of underlying price minus exercise price.
PV of exercise price tells you that it’s a European option; an American option could be exercised today, so you wouldn’t discount the exercise price.