Consider two six-month American puts at strikes 90 and 100. The risk free rate is 2%. The difference between the two put prices at any time before maturity will always be
A) Less than $10.
B) Equal to $10.
C) Greater than $10.
D) One cannot be sure of which of the preceding three choices is valid and more information may be required.

Question

Quizplus · Accepted Answer

The value of American put options depends on several factors including the current stock price, strike price, volatility, time to expiration, and the risk-free rate. The difference between the prices of two puts with different strike prices cannot be determined to be less than, equal to, or greater than $10 without additional information about the underlying asset and market conditions. American options can be exercised at any time before expiration, which adds complexity to their valuation compared to European options.

Consider Two Six-Month American Puts at Strikes 90 and 100