AdvancedMultiple choice
When is early exercise right? · Part 3 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.
An American put with strike $50 and a year left sits on a stock that pays no dividends and has collapsed to $1. What should its holder do?
- AExercise now
- BHold, since, as with calls, American options on non-dividend stocks are never exercised early
- CHold, because the stock could still fall to zero, which would raise the payoff by another dollar
- DSell the stock short as well, so that the put becomes worth exercising later
The worked solution is in Premium
The answer, the full working and the one idea to take away – for this and all 1,322 questions in the bank. Answer it in practice and your working is marked, with a known mistake named when you make one.
Learn the method
More options: fundamentals and arbitrage questions
- You are short a deep in-the-money American call on a stock going ex-dividend tomorrow.Applied
- A stock at $100 goes ex a $3 dividend tomorrow.Applied
- You are short a call struck at exactly where the stock is trading into the…Advanced
- When should you exercise an American call early?Advanced
- You are long a $95 call. The stock settles at $103. What is the payoff, ignoring premium?Foundation
- A stock trades at $50 and the $45 call trades at $7.Foundation