How Does the Interest Rate Environment Affect the Decision to Early Exercise a Put Option?
Higher interest rates make it more attractive to early exercise an American put option. By exercising the put, the holder receives the strike price cash immediately, which can then be invested to earn the higher risk-free rate.
This benefit of earning interest outweighs the loss of the remaining time value, making early exercise more likely when rates are high.
Glossar
Negative Interest Rate Environment
Environment ⎊ A negative interest rate environment occurs when central banks implement policy rates below zero, effectively charging commercial banks for holding reserves.
Early Exercise
Trigger ⎊ Early exercise, within cryptocurrency options and financial derivatives, denotes the right ⎊ but not the obligation ⎊ of the option holder to realize the intrinsic value of the contract prior to its scheduled expiration date.
Interest Rate
Yield ⎊ Interest rate, within cryptocurrency derivatives, represents the cost of capital or the return on an underlying asset utilized in constructing a derivative position, impacting pricing models and arbitrage opportunities.
Interest Rate Environment
Calibration ⎊ The interest rate environment, within cryptocurrency derivatives, functions as a critical calibration parameter for pricing models, notably those employing stochastic volatility frameworks like Heston.