option pricing Flashcards
1
Q
is it optimal to exercise a put before its expiry
A
yes only if its near 0 and you cant gain anything more from it, or if you believe its undervalued
2
Q
why are american options favoured? and why do its lower bounds differ?
A
C>so-k
c>so-ke^-rt
american favoured as you have the flexibility to exercise at any point but that also comes with a higher lower bound. US options will always be higher than its intrinsic value before maturity
3
Q
what is a riskless portfolio
A
setting up a portfolio thta no matter the price increase or fall say 10% either way, you would be sufficiently hedged
