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European Put-Call Parity and the Early Exercise Premium for American Currency Options

Author

Listed:
  • Geoffrey Poitras

    (Simon Fraser University, Canada)

  • Chris Veld

    (University of Stirling, U.K.)

  • Yuriy Zabolotnyuk

    (Carleton University, Canada)

Abstract

The European put-call parity condition is used to estimate the early exercise premium for American currency options traded on the Philadelphia Stock Exchange. Using a sample of 331 pairs of call and put options with the same exercise price and time to expiration, evidence is provided for early exercise premiums that average 5.03% for put options and 4.60% for call options. The premiums for both call and put options are strongly related to the interest rate differential and time to expiration. These results have implications for the use of European option pricing models in the valuation of American options.

Suggested Citation

  • Geoffrey Poitras & Chris Veld & Yuriy Zabolotnyuk, 2009. "European Put-Call Parity and the Early Exercise Premium for American Currency Options," Multinational Finance Journal, Multinational Finance Journal, vol. 13(1-2), pages 39-54, March-Jun.
    • Handle: RePEc:mfj:journl:v:13:y:2009:i:1-2:p:39-54
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    References listed on IDEAS

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    1. El-Mekkaoui, Mazen & Flood, Mark D., 1998. "Put-call parity revisited: intradaily tests in the foreign currency options market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 357-376, December.
    2. Frans De Roon & Chris Veld, 1996. "Put‐call parities and the value of early exercise for put options on a performance index," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(1), pages 71-80, February.
    3. Poitras, Geoffrey, 2002. "Risk Management, Speculation, and Derivative Securities," Elsevier Monographs, Elsevier, edition 1, number 9780125588225.
    4. Michael Dueker & Thomas W. Miller Jr., 2003. "Directly measuring early exercise premiums using American and European S&P 500 Index options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(3), pages 287-313, March.
    5. Philippe Jorion & Neal M. Stoughton, 1989. "An empirical investigation of the early exercise premium of foreign currency options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(5), pages 365-375, October.
    6. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
    7. Scott B. Laprise & Michael C. Fu & Steven I. Marcus & Andrew E. B. Lim & Huiju Zhang, 2006. "Pricing American-Style Derivatives with European Call Options," Management Science, INFORMS, vol. 52(1), pages 95-110, January.
    8. Zivney, Terry L., 1991. "The Value of Early Exercise in Option Prices: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(1), pages 129-138, March.
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    Cited by:

    1. Shuaiqiang Liu & 'Alvaro Leitao & Anastasia Borovykh & Cornelis W. Oosterlee, 2020. "On Calibration Neural Networks for extracting implied information from American options," Papers 2001.11786, arXiv.org.

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    More about this item

    Keywords

    European put-call parity; currency options; early exercise premium;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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