What Happens to an Option If the Underlying Stock Has

question 35

Multiple Choice

What happens to an option if the underlying stock has a 2-for-1 split?

• A)There is no change in either the exercise price or in the number of options held.
• B)The exercise price will adjust through normal market movements; the number of options will remain the same.
• C)The exercise price would become one-half of what it was, and the number of options held would double.
• D)The exercise price would double, and the number of options held would double.

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Definitions:

Short Run

In economics, a timeframe during which the quantity of at least one production factor cannot be increased.

Long Run

A period in which all factors of production and costs are variable, allowing for full adjustment to changes in market conditions.

Average Total Cost Curve

A graphic representation showing the cost per unit of output produced, combining both fixed and variable costs.

Purely Competitive Firm

A firm that operates in a market where there are many buyers and sellers, all producing homogeneous products, leading to no single firm being able to influence market price.