rate reorganizations. All actively traded options have an expiration date. The
cost of the option is called the premium. In evaluating an option, use is also
made of the risk-free interest rate, usually the rate on short-term U.S. Treasury
obligations, and the volatility of the security’s price.
A difference exists between American and European options. American
options allow the option owner to exercise the option at any time up to
and including the expiration date. The European option allows the owner to
exercise only on the expiration date. An equation exists to convert from the
evaluation of one type to the evaluation of the other.
E
XAMPLE23.1. ...
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