Answer: the exercise price exceeds the value of the underlying.

## Explanation For a European put option, exercise is justified when the option is **in-the-money**, meaning the exercise price (strike price) exceeds the current market price of the underlying asset. Let's analyze each option: **A. the option is out of the money.** - **Incorrect**. If a put option is out of the money, the exercise price is **less than** the market price of the underlying. Exercising would mean selling the underlying at a price lower than the market price, which would result in an immediate loss. **B. the exercise value is negative.** - **Incorrect**. The exercise value (intrinsic value) of a put option is calculated as: `Max(0, Exercise Price - Market Price)` - If the exercise value is negative, it means the exercise price is less than the market price, so the option is out of the money. The actual exercise value would be zero (not negative) since options cannot have negative intrinsic value. **C. the exercise price exceeds the value of the underlying.** - **Correct**. This is the definition of an in-the-money put option. When the exercise price is greater than the current market price of the underlying, exercising the put option allows the holder to sell the underlying at a higher price than the market price, resulting in a profit. ### Key Concepts: 1. **Put Option**: Gives the holder the right to sell the underlying asset at the exercise price. 2. **In-the-Money Put**: Exercise Price > Market Price 3. **At-the-Money Put**: Exercise Price = Market Price 4. **Out-of-the-Money Put**: Exercise Price < Market Price For European options (which can only be exercised at expiration), exercise is justified when the option is in-the-money at expiration. For American options (which can be exercised early), early exercise might be justified for puts under certain conditions (like high interest rates or dividend payments), but the question specifically asks about European put options. **Correct Answer: C**

Author: LeetQuiz .