American call options on shares are rarely exercised before expiry date because: Group of answer choices A

Finance Jan 08, 2021

American call options on shares are rarely exercised before expiry date because:

Group of answer choices

A. it sacrifices the option’s time value

B. it never pays to exercise before a share goes ex-dividend

C. it is too risky to exercise an option before its expiry date

D. it sacrifices the option’s intrinsic value

Expert Solution

American call options have higher amount of time value of option associated with it because it can be exercised before the maturity, so if somebody is trying to exercise it before the maturity then he will be losing out on the higher amount of time value of money so it is often advocated to exercise the American options at the maturity in order to protect the time value of option.

All the other options are false.

Correct answer is option (A) it sacrifice the option time value.

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