European Option

Posted in Finance, Accounting and Economics Terms, Total Reads: 684

Definition: European Option

An option gives a right but no obligation to the buyerto enter into a transaction involving an underlying assetat a predetermined price. Every option has a maturity date associated with it after which the option holder cannot exercise his right.

A European option is that option which gives the right to the option holder to exercise the option only at the time of maturity. This is in contrast with the American options which can be exercised at any time till the maturity or expiry date and hence are more flexible.

For example, if an investor buys an option to purchase 100 dollars at Rs.49 each on Jan 1, 2012. The maturity date for the option is March 31,2012. A European option holder will exercise the option on March 31,2012 only if the market price of 1 dollar exceeds Rs49. However, an American option holder can exercise the option anytime till March31, 2012 if the price of dollar exceeds Rs49.



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