Question #50
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 22
Status: Unattempted
Correct Answer: A
Question
Early exercise of in-the-money American options on:
Answer Choices:
A. futures is sometimes worthwhile but never is for options on forwards
B. forwards is sometimes worthwhile but never is for options on futures
C. both futures and forwards is sometimes worthwhile
Explanation
Early exercise of in-the-money American options on futures is sometimes worthwhile
because the immediate mark to market upon exercise will generate funds that can earn
interest. It is never worthwhile for options on forwards because no funds are generated
until the settlement date of the forward contract.