Peter Owns Ten European DFG 25 Calls with an Expiration

question 61

Multiple Choice

Peter owns ten European DFG 25 calls with an expiration date in September. Peter bought the calls at a price of $1.05. Today the 25 calls are priced at $13.40. Yesterday, June 14^th, DFG stock doubled in price to $42.80 a share. Today the stock is selling for $37.30 a share. Peter wants to profit from this sudden price surge before the price falls further. Ignore commissions and trading costs. Peter should:

• A) Exercise his option, sell 1,000 shares of DFG stock, and make a profit of $12,300.
• B) Exercise his option, sell 1,000 shares of DFG stock, and earn a net profit of $11,250.
• C) Sell his options and earn a net profit of $12,350.
• D) Sell his options and earn a net profit of $13,400.
• E) Peter cannot currently profit from owning his DFG calls.

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Definitions:

Debt-Related Restrictions

These are covenants or conditions included in loan agreements that limit certain actions of the borrower to protect the lender.

Tax-Reduction

Strategies or actions taken to minimize the amount of taxes owed by an individual or corporation.

Asset Cost

The total amount invested to acquire, produce, or improve a tangible or intangible asset, utilized for accounting and tax purposes.

Lease-Purchase Analysis

A financial evaluation technique used to determine the most cost-effective option between leasing an asset and purchasing it outright.