Question

1.An American call option on a stock ____________ (should or should not) be exercised early when no dividends are expected.

2.The European put price plus the stock price must be __________ (lower, equal, or higher) the European call price plus the __________ (present or future) value of the strike price.

3.A European put option is always worth _______________ (less than, equal, or more than) the present value of the strike price. A European call option is always worth ________________ (less than, equal, or more than) the stock price. An American call option is always worth ______________ (less than, equal, or more than) the stock price.

Answer 1

Derivative securities are classified as two types those are “options and futures”. An option is a type of derivative security as its value depends on the underlying security. The value of the option varies with the price of underlying securities.

• A call option is the right to buy specified number of shares at specified price within the specified time. The buyer of call option buys it in expectation that the underlying stock price will rise in future.

• A put option is the right to sell the specified number of shares at specified price within the specified time. The buyer of put option buys it in expectation that the underlying stock price will fall in future.

The main key point is an American option is more expensive than the European option. Suppose, if we exercise the American call option early, then we can lose the benefit of time value of money and as well as the value of the right to exercise the option in the coming future also.

Hence, based on the above explanation, An American call option on a stock should not be exercised early when no dividends are expected.

Derivative securities are classified as two types those are “options and futures”. An option is a type of derivative security as its value depends on the underlying security. The value of the option varies with the price of underlying securities.

• A call option is the right to buy specified number of shares at specified price within the specified time. The buyer of call option buys it in expectation that the underlying stock price will rise in future.

• A put option is the right to sell the specified number of shares at specified price within the specified time. The buyer of put option buys it in expectation that the underlying stock price will fall in future.

The main key point is an American option is more expensive than the European option. Suppose, if we exercise the American call option early, then we can lose the benefit of time value of money and as well as the value of the right to exercise the option in the coming future also.

Hence, based on the above explanation, An American call option on a stock should not be exercised early when no dividends are expected.