Warner Motors’ Stock Is Trading at $20 a Share

question 7

Multiple Choice

Warner Motors’ stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $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 more than $2.
• 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 less than $2, but the percentage increase in price will be more than 10%.
• 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:

Profitable

A financial state or condition where income exceeds expenses, leading to a net gain.

Retailers

Businesses or individuals that sell goods directly to consumers for their use and consumption, acting as the final link in the supply chain.

Vertical Contracts

Agreements between companies at different levels of the supply chain, such as between a manufacturer and a retailer, to govern the terms of purchase and sale.

Manufacturer's Belief

The perceptions or convictions held by manufacturers regarding the market, product quality, or the effectiveness of production processes.