Option

AMITAG1990
Finance Junkie
Posts: 89
Joined: Sat Sep 22, 2012 12:35 pm

Option

Postby AMITAG1990 » Mon Nov 12, 2012 5:59 pm

Early Excercise of an option is more likely for which of following..

A) American call option on stocks paying small Dividend
B) American call option close to maturity.

Please explain which one is right..??
In my oponion both are true.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Option

Postby content.pristine » Thu Nov 15, 2012 8:28 pm

A is correct.
You will only exercise an American call option if you expect a dividend.

Near expiry, you would not exercise it.. Even if it is ITM. The reason being, a call option is the right to buy at a particular cost. So it is assumed that when you exercise a call option, you will buy the underlying stock. You then risk the chance that the underlying falls below the exercise price. That's why it should not be exercised.

8-)

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: Option

Postby balajismz » Thu Nov 15, 2012 8:33 pm

I would go with option B, American Call option with a small dividend is no good to exercise early.

Balaji

AMITAG1990
Finance Junkie
Posts: 89
Joined: Sat Sep 22, 2012 12:35 pm

Re: Option

Postby AMITAG1990 » Thu Nov 15, 2012 8:50 pm

In my opinion also Ans should be A. But given answer is B..In Garp practice exam 2012... there are lot of controvesy in this exam, I afraid as this is a objective exam,Even We can not put our view.. whatever they will think that will only be true..


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