Call option: A call option can be defined as an agreement that gives the right to an investor to purchase a stock, commodity or other instrument at a certain price within a definite time period. However, the right is not an obligation. Put option: A put option can be defined as an option contract that gives the right to an owner to sell a definite amount of an underlying security at a definite price within a particular time. However, the right is not an obligation. To determine: The reason why an American option with a longer time to expiration is generally worth more than an otherwise identical option with a shorter time to expiration.

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Chapter 21, Problem 11P

Summary Introduction

Call option:

A call option can be defined as an agreement that gives the right to an investor to purchase a stock, commodity or other instrument at a certain price within a definite time period. However, the right is not an obligation.

Put option:

A put option can be defined as an option contract that gives the right to an owner to sell a definite amount of an underlying security at a definite price within a particular time. However, the right is not an obligation.

To determine:

The reason why an American option with a longer time to expiration is generally worth more than an otherwise identical option with a shorter time to expiration.

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