medium · FRM Part 1 Financial Markets and Products
What is the primary reason why put-call parity applies only to European options and not necessarily to American options?
- American options use discrete compounding while European options use continuous compounding.
- Put-call parity only works when volatility is constant, which is never true for American options.
- American options are traded on different exchanges with different margin requirements.
- The possibility of early exercise for American options can break the parity identity.
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