Let's say you've got American options on a future of a stock index. There are no dividends, and no risk-free rate either (assume $r=0$). Can these options then be treated as European from the perspective of using Black-Scholes to price them and calculate the Greeks?
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asked May 4, 2012 at 19:38
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1 Answer
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All this assumes the absence of arbitrage:
As you probably know without dividends it's is never optimal to early exercise a call option on a non dividend paying stock because then the time value is lost, if $r$ is non-negative.
Early exercise of an American put option can be optimal if the option is sufficiently far in the money and $r > 0$. Then you can earn interest on the money gained.
So yes, see also Hull, 7nd edition, chapter 9 'Properties of Stock Options', section 9.6 in particular.
In the rare case that $r < 0$ it can be optimal to exercise call options. However $r$ rarely, if ever, goes sufficiently negative on its own.
answered May 4, 2012 at 20:16
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2$\begingroup$ Technically, call options can be optimal to exercise early if $r<0$. $r$ rarely if ever goes sufficiently negative on its own, though. $\endgroup$– Brian BMay 7, 2012 at 12:31
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1$\begingroup$ Great comment! I added it to the answer since I feel an answer should stand on its own. $\endgroup$– Bob Jansen ♦May 7, 2012 at 18:37