If the Market Price of an Option Just Before Its

question 33

Multiple Choice

If the market price of an option just before its expiration is $33 while its strike price is $29, arbitrage will determine a price for it that:

• A)leaves an investor indifferent between buying the stock outright or buying an option and then exercising it.
• B)encourages the investor to buy the stock outright and sell it when the option expires.
• C)encourages the investor to buy an option and exercise it only after its expiration.
• D)encourages the investor to buy the stock outright and rewrite an option later.

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Definitions:

Net Present Value

A calculation that compares the present value of cash inflows with the present value of cash outflows over a period of time.

Working Capital

The difference between a company's current assets and current liabilities, indicating its ability to meet short-term obligations.

Discount Rate

A discount rate utilized in discounted cash flow assessment for establishing the present worth of expected cash flows.

Annual Operating Cash Inflows

Annual operating cash inflows are the monetary returns received from a company's day-to-day business operations over the course of a year.