You Own One Call Option with an Exercise Price of $55

question 322

Multiple Choice

You own one call option with an exercise price of $55 on Doo Little stock. The stock is currently selling for $55.20 a share but is expected to sell for either $54 or $62 a share in one year. The risk-
Free rate of return is 3 percent and the inflation rate is 2.5 percent. What is the current option price
If the option expires one year from now?

• A) $0.55
• B) $0.79
• C) $1.67
• D) $2.43
• E) $2.72

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Definitions:

Compensation Costs

The total expenses incurred by an employer to provide wages, salaries, and benefits to their employees.

Outsourcing

The practice of hiring third parties to perform services, handle operations or provide goods that are traditionally executed or produced in-house.

Economies of Scale

Cost advantages that a business can achieve due to expansion, leading to a reduction in the per unit cost as production scales up.

Compensation Policies

Guidelines and strategies a company uses to determine how employees are paid, including salaries, bonuses, and benefits, ensuring fair and competitive remuneration.