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]

An American option can be exercised any time before the specified expiry date.

A European option can be exercised only on the specified expiry date.

A Bermudan option can be exercised on any of several specified dates before the option expires

2]

A call option is a right but not obligation to buy the underlying asset at the specified strike price of the call option.

A put option is a right but not obligation to sell the underlying asset at the specified strike price of the put option.

3]

In-the-money - The price of the underlying asset is above the option strike price

Out-of-the-money - The price of the underlying asset is below the option strike price

At-the-money - The price of the underlying asset is equal to the option strike price

4]

In-the-money - The price of the underlying asset is below the option strike price

Out-of-the-money - The price of the underlying asset is above the option strike price

At-the-money - The price of the underlying asset is equal to the option strike price