Markets: A Rigorous Course

M08 · Problem 5 ★★

Early exercise of puts

(a) Show that a European put on a non-dividend-paying stock can be worth less than its intrinsic value. Give an explicit condition on SS under which p<K−Sp<K-S for every model. (b) Deduce that an American put is worth strictly more than the European put for such SS, if r>0r>0. (c) Why does the argument of Proposition 8.2.4 fail for puts?

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