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

Geoffrey Poitras (), Chris Veld () and Yuriy Zabolotnyuk
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Yuriy Zabolotnyuk: Carleton University, Canada

Multinational Finance Journal, 2009, vol. 13, issue 1-2, 39-54

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.

Keywords: European put-call parity; currency options; early exercise premium (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 G14 (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:mfj:journl:v:13:y:2009:i:1-2:p:39-54