Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

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

share|improve this question
1  
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

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 arxiv.org search for "American put" has many relevant articles.

share|improve this answer

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.

share|improve this answer
    
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

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.