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| Author: | Dawson, P. |
| Title: | Rational early exercise with market frictions |
| Journal: | Journal of Business Finance and Accounting
1996 : SEP, VOL. 23:7, p. 931-952 |
| Index terms: | OPTIONS STOCK MARKETS INDEXATION |
| Language: | eng |
| Abstract: | Market frictions affect rational options exercise. On LIFE, the scale of direct transactions costs makes it more economical for holders and writers of delivery-settled options to close positions by market trading, rather than exercising or facing exercise. In contrast, frictions serve to encourage exercise rather than market trading of cash-settled options, since the direct transactions costs are the same whilst the bid-ask spread is avoided in exercise. Differences in practice are observed between call and put options. These are attributed to clientele effects among both holders and writers of the different classes of options. |
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