Why Is an American Call Option Rarely Exercised Early,and Thus

question 6

Multiple Choice

Why is an American call option rarely exercised early,and thus priced similar to European options?

• A) Early exercise requires purchasing the stock
• B) Most option sellers cannot deliver the stock
• C) Option prices usually exceed intrinsic values
• D) Short sellers disrupt delivery

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Definitions:

Recession

A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Banking Crisis

A financial situation where banks face significant liquidity or solvency issues, leading to a lack of confidence and potential failure or government intervention.

Subprime Mortgages

Loans offered to individuals with poor credit scores at higher interest rates than conventional mortgages, contributing to the 2008 financial crisis.

Speculative Frenzy

A period marked by widespread excitement or irrational behavior among investors, leading to significant asset price volatility.