GCC Corporation Is Planning to Issue Options to Its Key

question 22

Multiple Choice

GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant?

• A) GCC's stock price becomes more risky (higher variance).
• B) The exercise price of the option is increased.
• C) The life of the option is increased, i.e., the time until it expires is lengthened.
• D) The government takes actions that increase the risk-free rate.

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Definitions:

Risk-Free Asset

An investment security that is guaranteed to return its full investment value (e.g., U.S. Treasury securities).

Market Price

The existing rate at which an asset or service can be sold or bought.

Convertible Bond

A type of bond that can be converted into a predetermined number of shares of the issuing company's stock at certain times during its life, usually at the discretion of the bondholder.

Conversion Price

The predetermined price at which convertible securities (like convertible bonds or preferred shares) can be converted into the issuing company's common stock.