Asked by Jessica Garrett on Apr 27, 2024
Verified
Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680, and the index is now at 1,720. What will happen when you exercise the option?
A) You will have to pay $1,680.
B) You will receive $1,720.
C) You will receive $1,680.
D) You will receive $4,000.
E) You will have to pay $4,000.
S&P 100 Index
An American stock market index consisting of 100 large, widely held companies across multiple industries in the United States.
Exercise Price
The fixed price at which the holder of an option can buy (in the case of a call) or sell (in the case of a put) the underlying asset.
Option
A financial derivative that gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date.
- Comprehend the basic principles of options, encompassing both calls and puts.
Verified Answer
SW
simran waliaMay 03, 2024
Final Answer :
D
Explanation :
When you exercise a call option on an index like the S&P 100, you receive the difference between the current index level and the exercise price, if the index is above the exercise price. Here, the difference is 1,720 - 1,680 = 40. Since index options are typically settled in cash and based on a multiplier (usually 100 for stock index options), you will receive 40 x 100 = $4,000.
Learning Objectives
- Comprehend the basic principles of options, encompassing both calls and puts.