a. If the underlying stock does not pay a dividend, it makes good economic sense to
exercise a call option as soon as the stock’s price exceeds the strike price by
about 10%, because this permits the option holder to lock in an immediate
, an option
is a derivativefinancial instrument
that specifies a contract between two parties for a future transaction on an asset at
a reference price (the strike).
The buyer of the option gains the right, but not the obligation, to engage in that
transaction, while the seller incurs the corresponding obligation to fulfill the
transaction. The price of an option derives from the difference between the
reference price and the value of the underlying
asset (commonly a stock
, a bond
, a currency
or a futures contract
) plus a premium based on the time remaining until the expiration of the option.
Other types of options exist, and options can in principle be created for any
type of valuable asset.