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Describe the Conditions When It Would Be Optimal to Exercise

question 9

Essay

Describe the conditions when it would be optimal to exercise an American Call and an American Put option prior to their expiration.


Definitions:

Special Causes

Unusual, not predictable factors in a process that can cause variations and are not part of the process itself.

Common Cause Variation

Variation that is inherent in a process over time, caused by factors that are consistently and predictably present.

Control Charts

Visual tools used in statistical process control to monitor how a process changes over time, highlighting variations outside of predefined bounds.

Special Cause Variation

A type of variation in a process, identified as being caused by specific identifiable factors, unlike common cause variation which is inherent to the process.

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