FoundationMultiple choice
When is early exercise right? · Part 1 of 3
American options can be exercised at any time up to expiry. Rates are 5% a year, continuously compounded. Each part asks whether giving up the remaining optionality is ever worth it.
Why should an American call on a stock that pays no dividends never be exercised early?
- ASelling it beats exercising
- BBecause exercising early forfeits the dividends the holder would otherwise have collected
- CBecause the exchange forbids exercise until the final week of the option’s life
- DBecause the call’s delta is below one, so exercise would lose on the stock leg
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