Question #68
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 31
Status: Unattempted
Correct Answer: A
Question
A non-dividend-paying option on a stock is most likely to be exercised early if the option is a(n):
Answer Choices:
A. European option
B. call option
C. put option
Explanation
After exercising a deep in-the-money put early, the sale proceeds can be invested at the
risk-free rate, and in this way the investor may earn interest worth more than the time
value of the put. Non-dividend-paying call options on stock will never be exercised early
because the minimum price of the option always exceeds its exercise value. European
options cannot be exercised early.