Question
Give two reasons why the early exercise of an American call option on a non-dividendpaying stock is not optimal. The first reason should involve the time value of money. The second should apply even if interest rates are zero.
Step 1
By exercising the option early, the option holder would be giving up the opportunity to earn interest or returns on the funds that would otherwise be used to exercise the option. By waiting until the expiration date, the option holder can continue to earn interest Show more…
Show all steps
Your feedback will help us improve your experience
Watch the video solution with this free unlock.
EMAIL
PASSWORD