Problem
An American option gives the holder the right to exercise at any time up to maturity ; a European option only at . The extra right should make the American option at least as valuable.
The Questions
- For a call on a non-dividend-paying stock, is it ever optimal to exercise early? Does the American call trade at a premium to the European call?
- For a put on a non-dividend-paying stock, can early exercise be optimal?
- What changes if the underlying pays dividends?