European vs American Call in reality

functor · Post by **functor** » Sun Jan 13, 2008 7:43 pm

In theory a European call should have the price of an American call, but does this really happen in the market? It seems like for an American call, if a stock crash started happening for instance, you could at least bail out. And there is the matter of utility that maybe you'd rather have X dollars with certainty instead of a chance of getting 2X dollars but also nothing.

Nonius · Post by **Nonius** » Sun Jan 13, 2008 8:56 pm

well, if the stock market crashed you coudl just sell your European call, right?

FDAXHunter · Post by **FDAXHunter** » Sun Jan 13, 2008 9:15 pm

Since when should the European call have the same price than its American counterpart?

marcos · Post by **marcos** » Sun Jan 13, 2008 9:26 pm

Dude, American calls are also in theory more expensive than the Euros. Does the magic word "dividends" ring a bell? So, answering your question: No.

chiral3 · Post by **chiral3** » Sun Jan 13, 2008 9:41 pm

I think you may be confusing the optimal exercise of a NON dividend paying american and the price of one versus the european, again, assuming no dividends.

functor · Post by **functor** » Mon Jan 14, 2008 1:32 am

Yes, I was assuming non-dividends. So there are no factors at all (transaction costs, liquidity issues, interest rate fluctuations) that would cause difference in price?

Baltazar · Post by **Baltazar** » Mon Jan 14, 2008 8:50 am

If the stock the call is written on is very difficult to borrow, ie the fee is high, you may want to exercise early,hence pay more for american call.

in theory at least, in practice i dunno if this happen really often.