Is it ever optimal to exercise early an American call option onthe futures price of gold. Explain in detail..

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Lelia LubowitzLv2

28 Sep 2019

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16) Which of the following statements is correct about the early exercise of American options?

		a) It is always optimal to exercise an American call option on a non-dividend-paying stock before the expiration date.
		b) It can be optimal to exercise an American put option on a non-dividend-paying stock early.
		c) It can be optimal to exercise an American call option on a non-dividend-paying stock early.
		d) It is never optimal to exercise an American put option on a non-dividend-paying stock before the expiration date.

champagnewhale873

Anticipating an Apple appreciation, you buy a 10/2016 $120 American-style Apple call option for $2.00 today. Being an American-style, you can early exercise it in September. 1. If you early exercise this call in September, what will be the payoff in September? 2. At what Apple price in September will you early exercise? Or, will you ever early exercise it? Explain.

1. A put option on gold is struck at $1237. What happens if you exercise when the futures price is $1209 and the futures contract settles at $1211?

2. The futures price of gold is $1237. A put and a call on this gold futures contract, both struck at $1215 both sell for $10. The interest rate is 2 percent. The options both expire in one year, and both are European. Identify an arbitrage opportunity.

3. The June Natural Gas Futures price is $3.336/mmBTU. A call on June NG struck at $3.40 is currently selling at $.149, and a put struck at $3.40 is selling at $.203. These prices are quoted as of 5 April. The option expires on 29 May, 2017. The relevant interest rate is 1.0 percent. The options are European. Identify an arbitrage opportunity. Indicate which option you should buy, which option you should sell, and whether you should buy or sell the futures contract.

4. If the options are American, is there still an arbitrage opportunity? If so, indicate the transactions you should undertake (what to buy, what to sell).

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