Warnes Motors' Stock Is Trading at $20 a Share

question 6

Multiple Choice

Warnes Motors' stock is trading at $20 a share.Three-month call options with an exercise price of $20 have a price of $1.50.Which of the following will occur if the stock price increases 10% to $22 a share?

• A) The price of the call option will increase by $2.
• B) The price of the call option will increase by less than $2,but the percentage increase in price will be more than 10%.
• C) The price of the call option will increase by less than $2,and the percentage increase in price will be less than 10%.
• D) The price of the call option will increase by more than $2.
• E) The price of the call option will increase by more than $2,but the percentage increase in price will be less than 10%.

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Definitions:

Privity Rule

A principle in contract law that states that contracts are private agreements between the parties who have entered into them, affecting no third parties.

Thing or Benefit

Refers to any item of value or advantage that is provided or promised in a transaction or agreement.

Unconscionable Contracts

Agreements that are so unfairly one-sided that they are deemed immoral or unjust and are therefore unenforceable under the law.

Unconscionability

A doctrine in contract law that describes terms that are so unjustly one-sided that they are considered shockingly unfair or oppressive.