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I know that for European Style put options we use the BSOP put option formula given in the formula sheet.
However BPP notes suggest that because real options are American style hence that formula can not be used to value Real (put) options i.e Option to abandon and redeploy. Intstead in one of its illustration question it used this to value the Real put options
p=[Pe N(-d2)e^-rt] – [Pa N(-d1)]
This has confused me, which one to use in exam? Please Help.
Thanks In advance.
If ever the examiner wishes you to use a formula other than those on the formula sheet for option pricing, then he will give you the formula in the question.
(It only happened once, and the examiner specifically gave the formula as part of the requirements).(PS If you want me to answer a question then please post it in the Ask the Tutor P4 Forum – it is not possible for me always to read all the questions in the general forum 🙂 )
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