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PRMIA Exam 8006 Topic 1 Question 42 Discussion
Topic #: 1
[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
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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