Show that your strategy is correct by constructing a payoff

Reference no: EM13926023

1. The value Max[0, X(1 + r)-T - S0] was shown to be the lowest possible value of a European put. Why is this value irrelevant for an American put?

2. Why do higher interest rates lead to higher call option prices but lower put option prices?

3. Suppose a European put price exceeds the value predicted by put-call parity. How could an investor profit? Demonstrate that your strategy is correct by constructing a payoff table showing the outcomes at expiration.

Reference no: EM13926023

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