Question

1. Explain the following brands of options: American, European, and Bermudan.

2. Options could be classified as call options and put options; Explain.

3. Differentiate the following scenarios of call option: In-the-money, At-the-money, and Out-of-the-money.

4. Distinguish the following scenarios of put option: In-the-money, At-the-money, and Out-of-the-money

Answer 1

1.

The classification between the three options lies in the time periods in which the options can be excercised.

American option: American Options are those which can be excercised on any trading day prior to their expiration.

European option: European options are those which cannot be excercised before the expiration date.

Bermudan option: Bermudan options are different from the other two options. It specifies few specific days before expiration on which the option can be excercised.

2.

Call option: A call option gives the buyer a right, but not obligation to buy the underlying security at the excercise price within a specific date.

Put option:A put option gives the buyer a right, but not obligation to sell the underlying security at the excercise price within a specific date.

3.

A call option is said to be In-the-money when the underlying security's current market price is greater than the call option's strike price.

A call option is said to be At-the-money when the underlying security's current market price is equal to the call option's strike price.

A call option is said to be Out-of-the-money when the underlying security's current market price is less than the call option's strike price.

4.

A put option is said to be In-the-money when the underlying security's current market price is less than the put option's strike price.

A put option is said to be At-the-money when the underlying security's current market price is equal to the put option's strike price.

A put option is said to be Out-of-the-money when the underlying security's current market price is greater than the put option's strike price.