A compound option is:

A) an American call option written on an European call option
B) an American put option written on an European put option
C) an option that will be rolled forward when date of expiry takes effect
D) none of these choices

Question

A compound option is:

A) an American call option written on an European call option
B) an American put option written on an European put option
C) an option that will be rolled forward when date of expiry takes effect
D) none of these choices

Quizplus · Accepted Answer

A compound option is basically an option written on an option that captures the ex-dividend day effect,where a sudden large fall in price may result in optimal early exercise.Early exercise prior to the ex-dividend date will not always be optimal,and so it is the option to exercise at this time that is valuable.

A Compound Option Is