Consider a two-period binomial model,where each period is 6 months.Assume the stock price is $75.00,σ = 0.35,and r = 0.05.An American call option with a strike price of $80 would be exercised early at what dividend yield?
A) 5.0%
B) 7.0%
C) 9.0%
D) Never exercise early

Question

Quizplus · Accepted Answer

In the context of American options, early exercise might be optimal for call options if dividends are expected to be paid on the underlying asset. However, the question does not provide specific details on dividend payments or their timing relative to the option's expiration. Given the information provided, it's not possible to determine a specific dividend yield at which early exercise becomes optimal without additional details on dividends. Therefore, without specifics on dividends, the general principle that American call options on non-dividend-paying stocks should not be exercised early due to the time value of money applies. This principle suggests that it's generally better to sell the option rather than exercise it early if the stock does not pay dividends, as the option itself may have intrinsic value in addition to time value.

Consider a Two-Period Binomial Model,where Each Period Is 6 Months