Problem 5. A financial expert is giving the following advice: It is rarely optimal to exercise...

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Problem 5. A financial expert is giving the following advice: "It is rarely optimal to exercise an American call option on a non-dividend paying stock early. However, when the underlying stock hits an all time high and then does not go up much over the next month, early exercise is optimal because the chance that the stock goes up in price any more is very small. In this type of situation, you can do nothing but lose by not exercising." Do you agree with the advise of the financial expert? Why? Problem 5. A financial expert is giving the following advice: "It is rarely optimal to exercise an American call option on a non-dividend paying stock early. However, when the underlying stock hits an all time high and then does not go up much over the next month, early exercise is optimal because the chance that the stock goes up in price any more is very small. In this type of situation, you can do nothing but lose by not exercising." Do you agree with the advise of the financial expert? Why?

Answer rating: 100% (QA)

The advice given by the financial expert regarding American call options on nondividend paying stocks is generally correct American call options give the holder the right but not the obligation to buy the underlying stock ... View the full answer