Question

i. What is the difference between an American option and a European option?

ii.  Does the holder of an option have to exercise it?

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

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

iv.  Explain how an increase in the strike price affect the value of put and call written on the stock.

Answer 1

1.
American option has the flexibility that it can be exercised any date on or before expiration date however European option can only be exercised on expiration date

2.
No, the option holder has the right but not the obligation and will exercise only when it is favorable to do so

3.
The statement is true as call seller does not have the right but the obligation to buy the share from the call buyer at the exercise price

4.
An increase in the strike price decreases the value of call but increases the value of put