question archive For the American Call option with dividend, I know we can use Black's approximation to check and valued the early exercise time and price
For the American Call option with dividend, I know we can use Black's approximation to check and valued the early exercise time and price
Subject:FinancePrice:2.84 Bought5
For the American Call option with dividend, I know we can use Black's approximation to check and valued the early exercise time and price.
How about the American Put option with dividend? I knew that the ex-dividend price will be lower, so it probably to wait for ex-dividend.
But is there has a exception? I exercise early I can earn Interest, is Interest > the non-exercise early put value, is it mean I should early exercise?
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
The Black' model as well as the binomial pricing model assumes that the option's value grow at risk free rate. Therefore excersising a put value before the dividend release or just before the dividend release will yield same value.
Now since Put Value ex-dividend > Put Value Pre Dividend = Put Value Exercised before
=> Put Value ex-dividend > Put Value Exercised
Therefore the interest earned is already value in the price of put exercised later and hence provide no profitable opportunity before dividend release.
Step-by-step explanation
Let me know if you have any trouble understanding
