Question

A stock currently sells for $34 a share but is expected to increase in value over the next six months to at least $36 a share. Assume there are 6-month options available on this stock with an exercise price of $35. Which of these options should have the most value today?a. American and European calls equallyb. European callc. European putd. American pute. American call

Answer 1

Answer:  American call

Explanation:

The price of the underlying stock is going to increase to at least $36 which is more than the exercise price on the option of $35. The option that would have more value therefore is a Call option because call options make profit when the exercise price is less than the market price.

The more valuable call option between the European and American call options is the American call option. This is because with an American call option, the holder is free to call in the option at any point in time up to the exercise date while a European option has to wait till the exercise date.

The American Call option is therefore the option with the most value today.