A Stock Has a Call with a Strike Price of $25

question 205

Multiple Choice

A stock has a call with a strike price of $25 that expires four days from now. The current price of the stock is $23.50. Suppose the expected prices over the next four days are $25.25, $24.50, $25.60, and $24.75, respectively. Which one of the following statements concerning the call is correct? Ignore the cost of the call and all transaction costs.

• A) If the call is a European call, the maximum profit to be gained on the call is $1.60.
• B) If the call is an American call, the maximum profit to be gained on the call is $.25.
• C) If the call is a European call, the call will never be exercised.
• D) If the call is a European call, the call will be worth $.25 at expiration.
• E) If the call is an American call, the call will be worth $.25 at expiration.

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