We demonstrated how American options can be priced using a multiperiod model. We also demonstrated that scenarios are possible in which the expected payoff from exercising an option at the end of a certain period will be higher than the option’ s calculated price for the start of the next period (according to the expected results for this next period), and so the option should be exercised.

a. Find the minimum share price for which it is clearly worthwhile to exercise the option for the continuous case as well.

b. Use your conclusions from the above to explain (in addition to the mathematical explanation provided in this chapter) why put option prices should be lower than those of call options with the same parameters (i.e., even when the chances for an increase or decrease are identical).