CFA Practice Question
A 1-month European call option on a stock with a strike of $35 is currently trading for $3.50. A similar American call has a price of $3.78. The current stock price is $31. If, at expiration, the stock price rises to $39, the price of the European call will be ______ while that of the American call (which hasn't been exercised early) will be ______.
A. $4.00; $4.00
B. $4.00; $4.28
C. zero; zero (both options are worthless)
Explanation: At expiration, the stock price exceeds the strike price by $4. Thus, the call option is in-the-money. At expiration, an American call is worth the same as a European call. Therefore, both options are worth $4 at expiration.
User Contributed Comments 5
| User | Comment |
|---|---|
| onehud | Why would the price of the call be different than what it is trading for? |
| Tomas | They are referring to the value of European vs. American option. Because the European option can only be excercised at maturity it has lower value than its American counterpart. However, here the valuation is at maturity and hence both options have the same value. |
| manju79 | On the date of expiration if you try to sell these options, it will trade for $4 |
| petervinh18 | Be careful on this Both European and American option was purchased at strike price of $35, while American put little trick on the question is $31 of stock price which is not an indication of strike price, rather it said stock price currently trading. |
| schweitzdm | American options cannot be priced for less than the price of European options. |