Question

In: Finance

Why these four options' premiums are higher than others and why some are equal. (European put,...

Why these four options' premiums are higher than others and why some are equal. (European put, American put, European put is a down-and-out barrier option and American put is a down-and-out barrier option. )

Solutions

Expert Solution

This four option premium like European put option along with American put option and American put is down and out barrier option and American put Lage down and out barrier option are valuing higher than other options, because it should generally be known that put option are more expensive than call option and one of the major driver of this difference in the prices volatility skew and volatility skew is the difference between the implied volatility for out of the money & the money and at the money options.

The possible reasons could be-

A. Volatility skew is the major reason due to which there is higher valuation for American as well as European put options.

B. The bearish investor and the pessimist view of the market will be a paying penalty and they will be paying higher price when buying the put options.

C. Interest rate is another factor which will be impacting the option pricing .

D. As the strike price will be decreasing, the implied volatility will increase so there is higher Premium for put options.

The put option like European put option is down and out barrier option and American put option is down and out barrier option is hybrid option and they will be generally costing more premium because they will be having additional embedded facilities and they will be costing more than normal American put options and European put options.

When we will compare the put option of American in nature and put option of European in nature then American put option will be having a higher price because they can be exercised anytime till maturity.


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