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PRMIA Exam 8006 Topic 1 Question 42 Discussion

Actual exam question for PRMIA's Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition exam
Question #: 42
Topic #: 1
[All Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Questions]

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

Which of the following statements is true:

1. American options can only be exercised at expiry

II. European options can be exercised at any time up to expiry

III. Bermudan options can be exercised at any time up to expiry except at certain times

IV. A European option can never be worth more than an American option

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Suggested Answer: D

Remember that:

- American options can be exercised at any time up to expiry

- European options can only be exercised at expiry

- Bermudan options can be exercised prior to expiry but only at certain dates or during certain specified periods, and not otherwise

- Since an American option can be exercised at any time prior to expiry while a European option can only be exercised at expiry, an American option will always be worth more than a European option

Therefore the first three statements are incorrect and Choice 'd' is the correct answer.


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