Answer-first summary for fast verification
Answer: c) I., II., and III.
For an **American put on a non-dividend-paying stock**, early exercise can be optimal when: - **I. Risk-free rate is increasing**: exercising earlier lets you receive the strike price sooner and invest it at a higher rate. - **II. Volatility is decreasing**: lower volatility reduces the value of waiting, making early exercise more attractive. - **III. Stock price is decreasing and/or low relative to strike**: the put is more likely to be in-the-money, so exercising early may be beneficial. ### Correct choice **c) I., II., and III.**
Author: Manit Arora
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182.2. Consider the following conditions with respect to a marketable American PUT option on a non-dividend-paying stock:
I. Risk-free rate (Rf) is increasing II. Volatility (sigma) of underlying stock is decreasing III. Underlying stock price (S) is decreasing and/or low relative to option strike price (K)
Under which of the above condition(s) is it theoretically optimal, or increasingly advisable, to “early” exercise (i.e., prior to expiration) the marketable American PUT option on the non-dividend-paying stock?
A
a) III. Only
B
b) II. and III.
C
c) I., II., and III.
D
d) None of the above
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