American vs. European option (time-value)

Hey AF

Kaplan Schweser has a question, that states:

When the underlying asset does not pay any cash flows, the value of an American call option is:

A) equal to the value of an otherwise identical European call option.

B) less than the value of an otherwise identical European call option.

C) greater than the value of an otherwise identical European call option.

Correct answer is A, “because the right to exercise a call option early is not valuable when the underlying asset does not pay any cash flows, the value of an American call option is equal to the value of an otherwise identical European call option”.

But… Despite the lack of any cash flows, wouldn’t the american option still have a higher value, since other stuff could influence the underlying, such that it would be beneficial to exercise early?

Best,
Christoffer

The only circumstance that makes it appropriate to exercise an option early is the time value being negative.

This can happen for deep in-the-money puts, but not for calls when there are no underlying cash flows.

About what sorts of “other stuff” are you thinking.

Macro or firm-specific events that influences the price of the underlying, such that the call would be deep in the money, but I guess that for call options on assets without cash flows (such as interest and dividends), you’ll never exercise early?