3.19.2005

Q: Under what circumstance should an American call...

...be exercised early?

A: American call options are never exercised early unless the underlying makes cash payments. Stocks pay dividends, bonds pay interest, foreign currencies pay interest, and commodities have carrying costs. Whether to exercise early depends on the tradeoff between the time value of the call and the cash payments from the underlying.

All American puts may be exercised early, regardless of whether the underlying makes cash payments or not.

Category: C++ Quant > Derivatives > Options

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