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Smooth pasting as rate of return equalization

Research output: Working paper

Publication date2005
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
<mark>Original language</mark>English

Publication series

NameAccounting and Finance Working Paper Series


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