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12.Which of the following is true?
A.An American call option on a stock should never be exercised early
B.An American call option on a stock should never be exercised early when no dividends are expected
C.There is always some chance that an American call option on a stock will be exercised early
D.There is always some chance that an American call option on a stock will be exercised early when no dividends are expected
A.An American call option on a stock should never be exercised early
B.An American call option on a stock should never be exercised early when no dividends are expected
C.There is always some chance that an American call option on a stock will be exercised early
D.There is always some chance that an American call option on a stock will be exercised early when no dividends are expected
Answer: B
An American call option should never be exercised early when the underlying stock does not pay dividends. There are two reasons. First, it is best to delay paying the strike price. Second the insurance provided by the option (that the stock price will fall below the strike price) is lost.
An American call option should never be exercised early when the underlying stock does not pay dividends. There are two reasons. First, it is best to delay paying the strike price. Second the insurance provided by the option (that the stock price will fall below the strike price) is lost.
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015