Practice Problem – American Options

Practice Question

Intro to Finance
Options
American Options, Return Options
MCQ

A local retail store allows you to return the merchandise you purchase and get your money back for up to 30 days after the purchase date. The store has, in effect, provided each shopper with _______________ options.

A) American Call
B) European Call
C) American Put
D) European Put
E) Convertible bond
Answer +
C) American Put
Explanation +

Step 1: Understanding Options
Options give the right—but not the obligation—to buy (call) or sell (put) an asset at a set price before expiration.

Step 2: Interpreting the Return Policy
Returning merchandise for a refund resembles a put option: you "sell" the product back to the store at the purchase price.

Step 3: American vs. European Style
Since returns are allowed anytime within 30 days, this mimics an American style option (exercisable at any time).

Conclusion:
This setup mirrors the flexibility and mechanics of an American Put option.