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:

Bad Debts Expense

An expense reported on the income statement, accounting for the estimated amount of accounts receivable that are not expected to be collected.

Allowance Method

The allowance method is an accounting technique used to estimate and prepare for the amount of accounts receivable that may not be collectible.

Journal Entries

Records of financial transactions in the accounting system, detailing debits and credits to various accounts.

Allowance for Doubtful Accounts

A contra-asset account used to estimate the portion of a company's receivables that may not be collectible.