Financial Risk Manager Part 1

A European call option is a type of derivative instrument that provides the holder with the right, but not the obligation, to buy an underlying asset, such as a stock, at a predetermined price (known as the strike price) on a specific date (the expiration date). This type of option can only be exercised on the expiration date, not before. This characteristic aligns with the instrument that John Thomas is interested in, as he wants the flexibility to decide whether to buy the underlying stock at the agreed price on the maturity date, depending on the prevailing market conditions.

Choice A (American call option) is incorrect. While an American call option does provide the holder with the right, but not the obligation, to purchase an underlying asset at a predetermined price, it can be exercised any time before its expiration date. This differs from John's requirement of exercising only on the date of maturity.

Choice B (European put option) is incorrect. A European put option gives its holder the right to sell an underlying asset at a predetermined price on or before its expiration date, not buy it as John intends to do.

Choice C (American put option) is incorrect. Similar to a European put option, an American put option also provides its holder with the right to sell an underlying asset at a predetermined price any time before its expiration date. This does not align with John's intention of buying and his requirement for exercising only on maturity.