Explanation:
The value of an option is influenced by several factors, including the time to expiration and the nature of the option.
Time to Expiration: As the time to expiration increases, the value of the option generally increases or remains the same. This is because the longer the time to expiration, the greater the chance that the underlying asset's price will move in a favorable direction, thereby increasing the option's value. Therefore, the 9-month options (both American and European) will have a higher value than the 3-month options.
Nature of the Option (American vs. European): Between the 9-month American and European options, the American option will have a higher value. This is because an American option gives the holder the right to exercise the option at any time up to the expiration date, providing more flexibility and potential for profit. In contrast, a European option can only be exercised at the expiration date. This lack of flexibility can limit the potential for profit, thereby reducing the value of the option.
Therefore, the 9-month American call option (Choice D) will have the highest value.
Q.749 Mehmet Orkan, a junior investment analyst at an Istanbul-based investment company, is analyzing various call options on U.S. stocks. He has obtained the following call options quotes on some blue-chip companies in the U.S consumer goods sector. Which of the following options has the highest value?
| Name | Nature of the option | Expiration date |
|---|---|---|
| A | European call option | 3 months |
| B | European call option | 9 months |
| C | American call option | 3 months |
| D | American call option | 9 months |
A
Option A
B
Option B
C
Option C
D
Option D
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