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. What is the early-exercise premium of a 100-strike, six-month American put option?
A) $0.15
B) $0.17
C) $0.89
D) $1.12

Question

Quizplus · Accepted Answer

The early-exercise premium is the difference between the intrinsic value of the option and its market price. The intrinsic value of the option is the difference between the strike price and the stock price. In this case, the strike price is $100 and the stock price is $100, so the intrinsic value of the option is $0. The market price of the option is not given, so we cannot calculate the early-exercise premium. However, we can say that the early-exercise premium is at least $0, since the option is worth at least its intrinsic value.

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