Explanation:
American put options on non-dividend-paying stocks may be optimally exercised early. American call options on non-dividend-paying stocks should never be exercised before expiration, and European options cannot be exercised prior to expiration. American call options on dividend-paying stocks may be exercised early if the dividend received exceeds the amount of forgone interest. If this is the case, exercise should take place immediately before (not on) the ex-dividend date.
(Book 3, Module 39.2, LO 39.d)
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Question 100
An options portfolio manager is going on vacation and does not plan to return until the day the options are set to expire. The portfolio manager gives his assistant instructions on four of the long option positions in his portfolio (all options have the same expiration date). Which of the following pairs of options and instructions is correct?
A
At-the-money American call option with a strike of $50 on a stock that does not pay a dividend; exercise if the stock price doubles.
B
American put option with a strike of $25 on a stock currently selling for $50 that does not pay a dividend; exercise the option if the stock price falls by more than 80%.
C
Deep-in-the-money European call option with a strike price of $30 and a current stock price of $50; exercise immediately.
D
Deep-in-the-money American call option with a strike price of $100 where the stock has a dividend that exceeds the risk-free rate by 4%; exercise on the ex-dividend date.
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