hard · FRM Part 1
An investor buys a 3-month American call option on a non-dividend paying stock.
Why is it generally sub-optimal to exercise this option before expiration?
- Early exercise triggers an immediate margin call.
- The premium is forfeited upon early exercise.
- American options can only be exercised on reset dates.
- Exercising destroys the remaining time value and the protection against further downside.
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