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Quantitative Finance · Glossary

What is Early-exercise premium?

Definition 6.1 Derivatives and Volatility · Chapter 6 — American Options and Early Exercise

The early-exercise premium of an American option is the difference between its value and the value of the European option with the same strike and expiry. It is never negative, and it is zero when early exercise is never optimal.

Early-exercise premium of a one-year at-the-money American put (spot 100, volatility 20%, no dividend) by interest rate: the value of receiving the strike early. At zero rate there is nothing to gain from exercising. Data: the tutorial.
Figure 6.1. Early-exercise premium of a one-year at-the-money American put (spot 100, volatility 20%, no dividend) by interest rate: the value of receiving the strike early. At zero rate there is nothing to gain from exercising. Data: the tutorial.
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