AppliedMultiple choice
When is early exercise right? · Part 2 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.
A deep in-the-money American call has strike $50 and a year left, and the stock at $80 goes ex-dividend by $3 tomorrow. What is the right conclusion?
- AExercising today, just before the ex-date, can be optimal
- BNever exercise, since an American call should always be held to expiry
- CExercise the day after the ex-date so that the dividend is received first
- DHold, because a deep in-the-money call has time value larger than any dividend
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