Peter Owns Ten European DFG 25 Calls with an Expiration

question 215

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 14th, 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:

Diseconomies of Scale

The phenomenon when a company or business grows so large that the costs per unit increase, leading to inefficiency.

Long-Run

A time period in economics where all inputs are variable, allowing firms to adjust all factors of production.

Average Cost Curve

A graph showing the cost per unit of output produced, calculated by dividing total costs by the quantity of output.

U‐Shaped

The U-shaped concept typically refers to a relationship where variables initially decrease, reach a lowest point, and then increase, forming a graph that resembles a U shape.