Financial Risk Manager Part 1

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An analyst at an investment company is researching the characteristics of American-style options. The analyst focuses on the ability and motivations of American-style option holders to exercise the option prior to maturity. Which of the following statements is correct regarding the early exercise of American-style stock options?

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Exercising an American-style call option early allows the holder to capture the time value of the option as well as its intrinsic value.

17.9%

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An American-style put option on stocks that pay no dividends should never be exercised early, since the option holder would give up the opportunity to profit from a drop in the stock price.

21.4%

An increase in dividends makes it more attractive for the holder of an American-style call option to exercise the option early.

42.9%

A decline in interest rates makes it more attractive for the holder of an American-style put option on a stock paying dividends to exercise the option early.

17.9%