Hall, Inc, Enters into a Call Option Contract with Bennett Investment

question 27

Multiple Choice

Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2011. This contract gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on April 30, 2011. WSM shares are trading at $100 per share on January 2, 2011, at which time Hall pays $100 for the call option. Assume that the price per share of WSM stock is $120 on April 30, 2011, and that the time value of the option has not changed. In order to settle the option contract, Hall, Inc., would most likely

• A) pay Bennett Investment $20,000.
• B) purchase the shares of WSM at $100 per share and sell the shares at $120 per share to Bennett.
• C) receive $20,000 from Bennett Investment.
• D) receive $400 from Bennett Investment.

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Definitions:

Financial Capital

Refers to the funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services.

Raw Materials

Basic materials that are processed or refined to create goods and products in various industries.

Soviet Union

A former federation of Communist republics that was established in 1922 and dissolved in 1991, consisting of Russia and several other countries in Eurasia.

Supply

The aggregate quantity of a product or service that can be bought at any specific price point within a particular market.