When Does a Change in the Value of a Call

question 60

Multiple Choice

When does a change in the value of a call option come the closest to matching the price change in a share of stock?

• A) When the stock is priced far above the strike price.
• B) When the stock is priced far below the strike price.
• C) When the stock is priced very near the strike price.
• D) Changes in call value always come close to matching changes in stock price.

---

Definitions:

Cost of Capital

Signifies the expected rate of return that market participants demand in order to commit money to an investment, considering risk and potential gains.

IRR

Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of investments, indicating the annualized rate of return that sets the net present value of all cash flows (both positive and negative) from a particular project equal to zero.

NPV

Net Present Value; a method used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows.

Payback Period

The length of time it takes for an investment to generate enough cash flow to recover its initial cost.