Question17 Which one of the following characterises a European option? The option can only be exercised at expiration The option grants its holder the right to sell at the strike price The option can be exercised at any time prior to expiration The option grants its holder the right to purchase at the strike price The option obligates its holder to buy or sell at the strike price ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

To begin, let's restate the question in our own terms: identify which statement best describes a European option.
Option 1: 'The option can only be exercised at expiration.' This is the defining feature of a European option. It limits exercise to a single, pre-specified date at expiration, not before.
Option 2: 'The option grants its holder the right to sell at the strike price.' This describes a put option, not a general European vs. American distinction. Both European and American puts could grant this right depending on the contract, so this alone does not characterize a European option.
Option 3: 'The option can be exercised at any time prior to expiration.' That describes an American option, which allows early exercise, whereas a European option does not permit early exercise.
Option 4: 'The option grants its holder the right to purchase at the strike price.' This describes a call option, but again it does not differentiate European from other exercise styles; the crucial point is about when exercise is allowed, not the direction of the underlying (buy vs sell).
Option 5: 'The option obligates its holder to buy or sell at the strike price.' An option gives the holder a right, not an obligation; an obligation to transact would describe a futures or forward contract, not a standard option.
In summary, the essential criterion distinguishing a European option from other styles is the exercise timing feature, and only Option 1 correctly states that exercise is allowed exclusively at expiration. The other options mix up the type of right (call vs put) or the exercise possibility (early exercise vs. at expiration) or mischaracterize the nature of an option as an obligation.

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