Timeline for American Option Bounds with Dividend Yield
Current License: CC BY-SA 3.0
8 events
| when toggle format | what | by | license | comment | |
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| Aug 31, 2016 at 14:12 | comment | added | M. Jeunesse | you have always $C^A_T(S,K)\geq (S-K)^+$ so yes, your lower bound is correct. I thought you were not ok with the upper bound. | |
| Aug 31, 2016 at 14:04 | history | edited | emcor | CC BY-SA 3.0 |
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| Aug 31, 2016 at 14:03 | comment | added | emcor | Yes I admit this would be correct.I believe the lower bounds would be $\max(S_0e^{-dT}-Ke^{-dT},S-K,0)\leq C_T^A$ (and accordingly for puts), as it is either optimal to wait (i.e. European bound) or exercise. E.g. for $D=1, R=2$ you get $S-1-(K-2)>S-K$ | |
| Aug 30, 2016 at 13:21 | comment | added | M. Jeunesse | are you ok with the fact that at time $0$, $C^A_T(S_0,K=0) = S_0$ ? | |
| Aug 30, 2016 at 12:47 | comment | added | emcor | By not exercising the option, you can save interest on the strike price (or not have to take a loan with interest). | |
| Aug 30, 2016 at 12:24 | comment | added | M. Jeunesse | For European Options, I am ok. Can you explicit how you "receive" the risk-free rate ? | |
| Aug 30, 2016 at 12:06 | comment | added | emcor | The upper bound for the call cannot be $S_0$, since a call option forgoes all dividends on the stock. Therefore $C_t\leq S_0e^{-dT}$. The lower bounds are in my opinion just the actual intrinsic values, as one can exercise at any time now. However, with dividends there might be a tradeoff between exercising to receive the dividend yield vs. waiting to receive the risk-free rate? | |
| Aug 30, 2016 at 8:09 | history | answered | M. Jeunesse | CC BY-SA 3.0 |