FREE Trial

Suppose that the risk-free interest rate is zero. Would an American put option ever be exercised early?

Question:

Suppose that the risk-free interest rate is zero. Would an American put option ever be exercised early? Explain.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 82% (23 reviews)

If r 0 then one should never exercise a put early There is no time value c...View the full answer


answer-question-section
Answered By
tutor-profile-image
Sinmon Warui Kamau
After moving up and down looking for a job, a friend introduced me to freelance writing. I started with content writing and later navigated to academic writing. I love writing because apart from making a living out of it, it is also a method of learning and helping others to learn.
5.00+ 40+ Reviews 45+ Question Solved
Related Book For  book-img-for-question
Investments

Investments

ISBN: 9780073530703

9th Edition

Authors: Zvi Bodie, Alex Kane, Alan J. Marcus

Question Posted:
See More Questions

Related Video

A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

Students also viewed these Accounting questions

The Little Black Book Of Laughs - ISBN: 979-8386514846 - Free Book