A stock is currently trading at $100. In each month, the stock will either increase in price by a factor of $u = 1.10$ or fall by a factor of $d = 0.90$ . The risk-free rate of interest per month is 0.1668% in simple terms, i.e., an investment of $1 at the risk-free rate returns $1.001668 after one month. If there are no dividends, what is the early-exercise premium of a 100-strike, six-month American call option?
A) $0
B) $0.15
C) $0.25
D) $0.50

Question

Quizplus · Accepted Answer

The early-exercise premium of an American call option on a non-dividend-paying stock is always zero. This is because it's never optimal to exercise an American call option early if the stock does not pay dividends. The option will always be worth at least as much as its intrinsic value, and exercising early forfeits the time value of the option.

A Stock Is Currently Trading at $100 u=1.10u = 1.10u=1.10 Or Fall by a Factor Of

A Stock Is Currently Trading at $100 $u = 1.10$ Or Fall by a Factor Of