- This topic has 3 replies, 2 voices, and was last updated 2 years ago by
.
- Posts
Dear Sir,
Could you please elaborate further on the following part of AFM Exchange traded foreign exchange derivatives technical article. The benefits that the author explains are not very clear for me.
“However, as the transaction date is prior to the maturity date of the options the company would in reality sell the options back to the market and thereby benefit from both the intrinsic and time value of the option. By exercising they only benefit from the intrinsic value. Hence, the fact that American options can be exercised at any time up to their maturity date gives them no real benefit over European options, which can only be exercised on the maturity date, so long as the options are tradable in active markets.”
Thanks in advance!
I do actually explain this in my free lectures!!
European style options can only be exercised on the maturity date, whereas American style options can be exercised at any time up to the maturity date.
If you have European style options and the transaction occurs before the maturity date, then you obviously cannot exercise the options, but what you can do is sell the options to someone else at whatever the option price is on that date.
In the exam, this is never relevant for calculation questions, but could be something useful to mention in the written parts of questions.
- The topic ‘AFM exchange-derivatives article’ is closed to new replies.