It Is May 19^th and You Own a June,European Call

question 10

Multiple Choice

It is May 19^th and you own a June,European call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

• A) Exercise the option now and take the profits.
• B) Buy more options on ABC Corp.
• C) Sell your ABC stock before its price declines.
• D) Sit and wait until the June expiration.

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Definitions:

Increasing-Cost Industry

Industry whose long-run supply curve is upward sloping.

Output Tax

A tax levied on the production or output of goods and services, often implemented to regulate or diminish the production of certain products.

Cost And Supply Curves

Graphical representations that show how the cost of producing a good and the quantity supplied vary with quantity produced.

Constant-Cost Industry

An industry in which the costs of production do not change as the industry's output changes.