A stock is currently trading at $100.In each month,the stock will either increase in price by a factor of $u = 1.10$ or fall by a factor of $d = 0.90$ .The risk-free rate of interest per month is 0.1668% in simple terms,i.e. ,an investment of $1 at the risk-free rate returns $1.001668 after one month.If there are no dividends,what is the early-exercise premium of a 100-strike,six-month American call option?
A)$0
B)$0.15
C)$0.25
D)$0.50

Question

Quizplus · Accepted Answer

The early-exercise premium of an American call option on a non-dividend-paying stock is $0. This is because, in the absence of dividends, it is never optimal to exercise an American call option early due to the time value of money. The option holder can always sell the option itself if it's in the money rather than exercising it, which would yield a higher value than exercising due to the remaining time value of the option.

A Stock Is Currently Trading at $100 u=1.10u = 1.10u=1.10 Or Fall by a Factor Of

A Stock Is Currently Trading at $100 $u = 1.10$ Or Fall by a Factor Of