An American Call-Option Buyer on a Nondividend-Paying Stock Will

question 61

Multiple Choice

An American call-option buyer on a nondividend-paying stock will

• A) always exercise the call as soon as it is in the money.
• B) only exercise the call when the stock price exceeds the previous high.
• C) never exercise the call early.
• D) buy an offsetting put whenever the stock price drops below the strike price.
• E) None of the options are correct.

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Definitions:

Theoretical Value

The estimated price of an asset or financial instrument based on mathematical models instead of market prices, often used in options pricing.

Binomial Option Price

A mathematical model that is used to calculate the theoretical price of options using a binomial tree of possible price movements.

Black Scholes Price

A theoretical price model for European-style options that estimates the option's price given certain fixed financial variables.

Subintervals

Divisions of a larger interval into smaller ones, often used in mathematical analysis and computations.