Question2 Which one of the following characterises a European option? The option grants its holder the right to purchase at the strike price The option can only be exercised at expiration The option can be exercised at any time prior to expiration The option obligates its holder to buy or sell at the strike price The option grants its holder the right to sell at the strike price ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

To tackle this question, I’ll evaluate what characterizes a European option and compare each statement against that definition.
Option 1: 'The option grants its holder the right to purchase at the strike price.' This describes a standard call option, but it does not specify the exercise timing. While a European call does grant this right, the key European feature is not captured here, making this description incomplete as a standalone characteristic.
Option 2: 'The option can only be exercised at expiration.' This is the defining feature of a European option: exercise is restricted to a single date—the expiration date. This aligns with the formal definition and distinguishes European options from American options, which can be exercised any time before expiration.
Option 3: 'The option can be exercised at any time prior to expiration.' This describes an American (or plain-vanilla) option, not a European one. Allowing exercise at any time is precisely the hallmark of American-style options, which contrasts with the European constraint described in Option 2.
Option 4: 'The option obligates its holder to buy or sell at the strike price.' An option provides the right, not the obligation; the obligation lies with the writer (the seller) in the sense of delivering or accepting the asset if the holder exercises. Therefore, this statement misstates the fundamental nature of an option’s payoff.
Option 5: 'The option grants its holder the right to sell at the strike price.' This describes a put option's payoff potential, not the specific timing feature. It also does not address exercise timing, which is the critical European vs. American distinction. Hence it does not uniquely characterize a European option.
In summary, the essential distinction for a European option is the ability to exercise only at expiration (Option 2), whereas the other options either omit the timing constraint or misstate the rights and obligations involved with option exercise.

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