Asked by Michael Culham on Jun 05, 2024
Verified
Suppose the price of a share of ONB stock is $200. An April call option on ONB stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share
A) increases to $204.
B) decreases to $190.
C) increases to $206.
D) decreases to $196.
E) None of the options are correct.
Call Option
A financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price within a specific time frame.
Premium
The amount paid for a product or service beyond its intrinsic value, often due to insurance, quality, or demand factors.
Profit
The financial gain achieved when the revenues generated from an activity exceed the expenses, costs, and taxes associated with that activity.
- Acquire knowledge about the financial repercussions and dangers of exercising options before their maturity or upon their expiration.
Verified Answer
RH
Rosalio HernandezJun 07, 2024
Final Answer :
C
Explanation :
The holder of the call option will earn a profit if the price of the share increases above the sum of the exercise price ($200) and the premium paid ($5), which is $205. Therefore, if the price increases to $206, the holder can buy the stock at $200 and sell it at $206, making a profit after covering the $5 premium.
Learning Objectives
- Acquire knowledge about the financial repercussions and dangers of exercising options before their maturity or upon their expiration.