Answer-first summary for fast verification
Answer: None of the above
For a **marketable American call option on a non-dividend-paying stock**, early exercise is **theoretically never optimal**. ### Why? - By exercising early, the holder gives up the remaining **time value** of the option. - On a non-dividend-paying stock, there is **no dividend** to compensate for giving up the option. - Therefore, it is always preferable to keep the call option alive rather than exercise it early. ### Effect of the listed conditions - **Higher risk-free rates** can make early exercise *more attractive in some contexts*, but **not enough to make early exercise optimal** for a non-dividend-paying stock. - **Lower volatility** reduces option time value, but early exercise is still not optimal. - **Higher stock price** may make the call deeper in-the-money, but still does not create an early-exercise advantage without dividends. - **Believing the stock is overpriced** is a trading view, not a reason to exercise the call early. ### Correct answer **D. None of the above**
Author: Manit Arora
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Q-182.1. Consider the following conditions with respect to a marketable American CALL option on a non-dividend-paying stock:
I. Risk-free rate (Rf) is increasing
II. Volatility (sigma) of underlying stock is decreasing
III. The underlying stock price (S) is increasing
IV. Investor has good reason to think stock is currently (S0) overpriced
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 CALL option on the non-dividend-paying stock?
A
III. Only
B
II., III. and IV.
C
I., II., III. and IV.
D
None of the above
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