CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
Compared with a European call option on the same underlying and with the same strike and expiration, an American call option is most likely worth:
An American call is worth at least as much as an equivalent European call. It carries the same rights plus the ability to exercise early, so its value is greater than or equal to the European option's value, and equal when early exercise has no benefit.
- Aless than or equal to the European call
- Bthe same as or more than the European callCorrect
- Cmore than the European call only if the underlying pays no dividends
Explanation
An American option gives all the rights of a European option plus early exercise, so it cannot be worth less. It may be equal when early exercise is never optimal, for example on a non-dividend-paying stock. The third option wrongly requires strictly greater value in that case.
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