A Call Option Has an Exercise Price of $100

question 73

Multiple Choice

A call option has an exercise price of $100. At the exercise date, the stock price could be either $50 or $150. Which investment strategy provides the same payoff as the stock?

• A)Lend PV of $50 and buy two calls.
• B)Lend PV of $50 and sell two calls.
• C)Borrow $50 and buy two calls.
• D)Borrow $50 and sell two calls.

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Definitions:

Put-Call Parity

A principle stating the relationship between the prices of European put and call options with the same strike price and expiration date.

Put Options

Financial contracts that give the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.

Call Options

Financial derivatives that give the buyer the right, but not the obligation, to buy a stock or other financial asset at a specified price within a specific time frame.

Strike Price

The strike price is 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 security or commodity.