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Put-call parity is used to study the early exercise premium for currency options traded on the Philadelphia Stock Exchange. Using 564 pairs of call and put options evidence is provided that the early exercise premiums are on average 5.71% for put options and 6.88% for call options. The premiums for both call and put options are strongly related to time to maturity and the interest rate differential. These results are important when using a European option pricing model for the valuation of American options. S ince the collapse of the Bretton Woods system in 1973, companies have looked for ways to hedge their currency risks. This has led to the creation of a large market for currency options. Most of these options are American style, which means that they can be exercised at any time before their maturity date. This causes a problem: The most commonly used formula for the valuation of currency options — the currency option variant of the Black-Scholes model — does not take the premium for early exercise into account.1 For this reason it is important to get an idea about the size of the early exercise premium and of the factors that determine this premium.

Put-Call Parity and the Early Exercise Premium for Currency Options