Re: Calculating American Early Exercise Premium

Posted by nabbleuser2008 on Aug 25, 2008; 5:32pm
URL: http://quantlib.414.s1.nabble.com/Calculating-American-Early-Exercise-Premium-tp1575p1578.html

Upon further investigation, for call options, I noticed that the two prices differ by a small amount in some cases, specially for the longer maturities, but the difference is in 1/100th of a penny, so the difference is not significant when pricing to the nearest penny.  

Does that observation make sense ? I expected to see bigger premium, specially for longer maturities. I am looking at upto almost 2 years maturity.

Thanks much for any suggestions, and comments ..

nabbleuser2008 wrote

thanks.

the stocks I've tried do have the dividends. I didn't try the puts since i'm only interested in calls for my current work, but I can check the puts.  

thank you.
C

Ferdinando Ametrano wrote

mmm... in the case of a call option on a non-dividend paying stock the
american and european prices are the same.
Do you have dividends? What about put options?

ciao -- Nando

On Mon, Aug 25, 2008 at 5:30 PM, nabbleuser2008 <[e-mail]> wrote:
>
> Hi,
>  I'm trying to calculate the european option price from an american by
> taking out the early exercise premium. I first use FDDividendAmericanEngine
> to calculte the implied vol, then use  Barone-Adesy and Whaley engine and
> Black Scholes engines to calculate the american and european prices which I
> thought would allow me to get the american premium.
>
>  But, when I do this calculation, my two option prices always match. Do you
> think my above thinking is flawed or it could be due to a programming error
> on my part. Anycase, if you have a  better alternative for what I'm trying
> to do, I really appreciate to hear that too.
>
>  Thank you very much.
>
> C
> --
> View this message in context: http://www.nabble.com/Calculating-American-Early-Exercise-Premium-tp19146072p19146072.html
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>
>
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