Asked by Haseeb Akhtar on May 05, 2024
Verified
Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share
A) increases to $504.
B) decreases to $490.
C) increases to $506.
D) decreases to $496.
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 asset at a specified price within a specified period.
Premium
The amount paid for an option or insurance policy over its intrinsic value or the amount by which the price of a bond exceeds its face value.
Exercise Price
The price level at which an option owner has the right to carry out a purchase (for calls) or a sale (for puts) of the asset in question.
- Apply understanding of call and put options to evaluate the break-even point, maximum achievable profit, and loss.
- Understand the financial implications and risks associated with exercising options early or at expiration.
Verified Answer
ZK
Zybrea KnightMay 07, 2024
Final Answer :
C
Explanation :
For the holder of the call option to earn a profit, the price of the share must exceed the sum of the exercise price ($500) and the premium paid for the option ($5), which totals $505. Therefore, if the price increases to $506, the holder can buy the stock at $500 and sell it for $506, making a profit after covering the $5 premium.
Learning Objectives
- Apply understanding of call and put options to evaluate the break-even point, maximum achievable profit, and loss.
- Understand the financial implications and risks associated with exercising options early or at expiration.