16) Which of the following statements is correct about the early exercise of Ame

ID: 2655007 • Letter: 1

Question

16) Which of the following statements is correct about the early exercise of American options?

a) It is always optimal to exercise an American call option on a non-dividend-paying stock before the expiration date.

b) It can be optimal to exercise an American put option on a non-dividend-paying stock early.

c) It can be optimal to exercise an American call option on a non-dividend-paying stock early.

d) It is never optimal to exercise an American put option on a non-dividend-paying stock before the expiration date.

a) It is always optimal to exercise an American call option on a non-dividend-paying stock before the expiration date.

b) It can be optimal to exercise an American put option on a non-dividend-paying stock early.

c) It can be optimal to exercise an American call option on a non-dividend-paying stock early.

d) It is never optimal to exercise an American put option on a non-dividend-paying stock before the expiration date.

d) It is never optimal to exercise an American put option on a non-dividend-paying stock before the expiration date

Early exercise is never optimal if the investor plan to hold the stock past the expiration of the option.

• Consider an option (deep) in the money ( St > K )

• If you wait until the expiration of the option to exercise it, you can earn interest on your cash.

• If the price continue to rise, you can always exercise later at no loss

. • If the price falls (below the strike price), you may have preferred never to exercise.

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