Consider a put option expiring in 120 days on a non-dividend-paying stock trading at 47 when the risk-free rate is 5%. What are the lower bounds for an American put and a European put with exercise prices of 50?
An American put can be exercised immediately for a $3 gain, the European put cannot be exercised until expiration so its minimum value is 50 / (1.05)120/365 − 47 = $2.20.
