Question

Number 5.

1. What is the difference between an American option and a European option?
2. Does the holder of an option have to exercise it?
3. Explain why the following statement is true or false.

“A put seller is at risk of losing money if the underlying price increases.”

4. Explain why the following statement is true or false.

“A call seller is obliged to buy the underlying share at the exercise price.”

5. What is the maximum profit potential if you long a call or put option?

Answer 1

1. American option can be exercised any time before the maturity whereas European options will be exercised only at the maturity date.

American options are more expensive than the European options.

American option will also be having a high degree of flexibility whereas European option does not have any flexibility.

2. No, because it is a right not an obligation

3. The given statement is FALSE as when one is selling a put option, it will mean that he wants the prices to go up because put option will be indicating down side.

4. Given statement is TRUE because it is an obligation of call seller to buyer at exercise price.

5. maximum profit potential will be unlimited when you are buying a call option or put option