Question 2421 of 3960 from exam CFA® LEVEL 1: CFA® Level 1

Question 2421 of 3960 from exam CFA® LEVEL 1: CFA® Level 1

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Question

Joel Franklin, CFA, has just been promoted to junior portfolio manager for a large equity portfolio at Davidson-Sherman (DS), a large multinational investment banking firm. He is specifically responsible for the development of a new investment strategy that DS wants all equity portfolios to implement. DS has decided to begin overlaying option strategies on all equity portfolios. The reason for this decision is the relatively poor performance of many of their equity portfolios. They look at the option strategies as an opportunity to add value or reduce risk. Franklin recognizes that the behavior of an options value is dependent on many variables and decides to spend information shown in Exhibit's 1 and 2 for European style options.

Joel recognizes that his software only includes the valuation information for European style options. He wants to know how the premium of an American style option compares with its European counterpart. Which of the following is TRUE? The premium of the American option:

Answers

Explanations

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A. B. C. D.

Explanation

The owner of a European option may exercise it only at expiration whereas an American option can be exercised at any time before or at expiration. Therefore, an

American option cannot be worth less than a European option.

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