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Both puts and calls decline in value when volatility decreases
Both puts and calls decline in value when volatility decreases. T/F 8. American put options on stocks that pay no dividends are often worth more than corresponding European put options. T/F.
Expert Solution
ANSWER -
Q7 )
The statement is true
Volatility increases the value of the option. Due to Volatility the chances of the options becoming "In the Money" increases. So if the volatility in the market decreases, then both the put and call option value decreses.
Q8 )
Solution: Reason why American put options are worth more because put is right to sell. European option are settled only on Maturity while American put options can be excersize anytime.
Since put option is right to sell, so you realize money early as compared to European put where you can sell at maturity.
Therefore, American options on put are worth more as compared to European put options
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