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Answer: It can be optimal to exercise an American put option on a non-dividend-paying stock early.
## Explanation For American options: - **American call options on non-dividend-paying stocks**: It is **never optimal** to exercise early because the time value of the option is always positive. The option holder can always sell the option for more than its intrinsic value rather than exercising it. - **American put options on non-dividend-paying stocks**: It **can be optimal** to exercise early, especially when the stock price is very low. This is because the put option holder can receive the strike price immediately and invest it at the risk-free rate, which may be more valuable than waiting until expiration. Therefore, option B is correct: "It can be optimal to exercise an American put option on a non-dividend-paying stock early." **Analysis of other options:** - A: Incorrect - American calls on non-dividend stocks should never be exercised early - C: Incorrect - Same reasoning as A - D: Incorrect - American puts can be exercised early in certain situations
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Which of the following statements is correct about the early exercise of American options?
A
It is always optimal to exercise an American call option on a non-dividend-paying stock before the expiration date.
B
It can be optimal to exercise an American put option on a non-dividend-paying stock early.
C
It can be optimal to exercise an American call option on a non-dividend-paying stock early.
D
It is never optimal to exercise an American put option on a non-dividend-paying stock before the expiration date.