The Current Price of a Non-Dividend-Paying Stock Is $30

question 13

Multiple Choice

The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. Which of the following hedges the position?

• A) Buy 0.6 shares for each call option sold
• B) Buy 0.4 shares for each call option sold
• C) Short 0.6 shares for each call option sold
• D) Short 0.4 shares for each call option sold

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Definitions:

Contribution Margin

The difference between sales revenue and variable costs, showing how much revenue contributes to covering fixed costs.

Fixed Budget

A budget that remains constant regardless of changes in the level of activity or volume, typically used for planning purposes.

Variable Costs

Outlays that fluctuate according to the amount of production or volume of sales.

Flexible Budget Performance Report

A report comparing actual operating results to a budget that adjusts with changes in the volume of activity.