Question

An American call option on a share of stock is never exercised early if

Group of answer choices

The underlying stock has low volatility.

The underlying stock does not pay dividends

The risk-free rate is zero.

The underlying stock pays large dividends.

Answer 1

You should never early exercise an american option,especially if its a non dividend paying stock as non dividend paying stock have limited growth opportunity.

The option has intrinsic value and time value.The intrinsic value of the option is always greater than 0.Along with that the cash has time value,So late exercise will have earn interest in case of a non dividend paying stock due to time value concept.

so My answer would be( B)The underlying stock does not pay dividends

If risk free rate is zero then late exercise will not make any impact as it is indifferent and a low volatility doesnot have much to do with late exercise of an option.So rest of the options are not true.