Home > Research > Publications & Outputs > Smooth pasting as rate of return equalization

Electronic data

View graph of relations

Smooth pasting as rate of return equalization

Research output: Working paper

Published
Publication date2005
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
Original languageEnglish

Publication series

NameAccounting and Finance Working Paper Series

Abstract

We further elucidate the smooth pasting condition behind optimal early exercise of options. It is easy to show that smooth pasting implies rate of return equalization between the option and the levered position that results from exercise. This yields new economic insights into the optimal early exercise condition that the option holder faces