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Consider american options on interest rate futures such as the 10-year treasury note. When is early exercise optimal?

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A call or a put? I think it's never optimal to exercise an American Call without dividends. – SRKX Nov 12 '11 at 20:55

2 Answers 2

Since the treasury note future does not pay coupons or dividends, and is a future as opposed to a cash instrument that you purchase, it is never optimal to exercise early.

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even for puts? I thought that was only for american calls. – SRKX Nov 18 '11 at 10:02
Yes, that only works for American calls, but an American put option might be approximated as European if far enough from the exercise boundary, like out-of-the-money. – Jeff Burdges Nov 18 '11 at 15:56

As OracleOfNJ said, there is never any advantage to early exercise of an American style call option unless the underlying asset offers some advantage, usually dividends, which does not apply to interest rate futures.

American put options were among the biggest open problems in finance until people learned how to treat them as free boundary problems. In other words, you'd first derive the Black-Scholes-like PDE that describes the equivalent European option product, but you'd solve it with a lower boundary condition described in terms of the PDE's solution.

I've never thought about American put options on interest rate futures specifically, but a Google search for "American put free boundary problem" yields some reasonable starting points, and an search for "American put" has many relevant articles.

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