# Put price, payoff, how come? [closed]

From Merton (1973) the following boundary condition is valid for an American put.

G(S,t:E) >= Max [0,E-S]


I dont understand how the Rational put price can be greater than the potential payoff? You may pay for something that will always yield you less right?

Could you think of this as - European put payoff sets the lower floor of and american put?

## closed as off-topic by LocalVolatility, Alex C, Helin, amdopt, David AddisonFeb 11 '18 at 21:27

This question appears to be off-topic. The users who voted to close gave this specific reason:

• "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – LocalVolatility, Alex C, Helin, amdopt, David Addison
If this question can be reworded to fit the rules in the help center, please edit the question.

• You are confusing the current intrinsic value $\max \{ E - S_t, 0 \}$, which is what you get when you exercise immediately, with the max. potential payoff $E$. Given that you have the option to exercise at any time, the option price can never be lower than the current intrinsic value. I am voting to close the question for being too basic. – LocalVolatility Jan 20 '18 at 12:29