Chapter 11 Properties of Stock Options

In this chapter, we look at the factors affecting stock option prices. We use a number of different arbitrage arguments to explore the relationships between European option prices, American option prices, and the underlying stock price. The most important of these relationships is put–call parity, which is a relationship between the price of a European call option, the price of a European put option, and the underlying stock price.

The chapter examines whether American options should be exercised early. It shows that it is never optimal to exercise an American call option on a non-dividend-paying stock prior to the option’s expiration, but that under some circumstances the early exercise of an American ...

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