|Author||Topic: A question about American option|
|Which of the following statements about the early exercise of an option is least accurate? For an American:
A) call option, on an asset with no cash flows, early exercise can be profitable if the option is far in the money.
B) put option on an asset with no cash flows, early exercise is sometimes optimal.
C) call option on an asset with positive cash flows, early exercise is sometimes profitable.
The correct answer was A.
Early exercise of an American call option on an asset with no cash flows is never profitable, they are worth more 'alive than dead'.
Q: Anyone can explain?
|You are holding a call option, meaning you have right to buy, meaning if you exercise now you have to part with your cash now.
If option is deep in the money, then it is better to exercise it later rather than now. That way you get to keep your cash longer and earn discount rate on it.
Always, other things same, it is better to
a) buy later rather than sooner
b) and sell sooner rather than later
Hope this helps.