When Early Exercise Can Be Optimal for an American Call

Summary

The question seeks binomial-model parameters that would make early exercise possible for an American call. The answer gives a general condition instead of a numerical example: a positive dividend rate or a negative interest rate is needed. Under the standard setting with neither condition, early exercise is never optimal for a call, so changing the binomial up and down factors or strike alone will not produce the requested case.

The explanation frames this as a model-free result, rather than a peculiarity of a particular binomial parameter choice. It gives no derivation, numerical illustration, or detailed treatment of dividend timing and rate conventions. The takeaway is therefore a useful constraint for constructing examples and checking an American-call pricing tree, while applications should ensure the model’s carry assumptions match the asset and contract being valued.

Key ideas

• For a standard American call, early exercise is not optimal when interest rates are nonnegative and the underlying pays no dividends.
• A positive dividend rate can make early exercise worth considering.
• A negative interest rate can also make early exercise possible.
• The answer gives a general condition, not a specific binomial parameter set or derivation.

Tags

# binomial - parameters at which american option hits early exercise possibility


# binomial - parameters at which american option hits early exercise possibility












I am looking for a set of parameters (d,u,r,So,K, N=?) for pricing an american call using binomial where the call hits the early exercise possibility.

Do you have any exemplary set?

## Answer by Mark Joshi (score 1)

https://quant.stackexchange.com/a/22864

you need a positive dividend rate or a negative interest rate. Without these, it is a model-free result that early exercise is never optimal for a call option.

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