Jillian Owns an Option Which Gives Her the Right to Purchase

question 5

Multiple Choice

Jillian owns an option which gives her the right to purchase shares of WAN stock at a price of $20 a share. Currently,WAN stock is selling for $24.50. Jillian would like to profit on this stock but is not permitted to exercise her option for another two weeks. Which of the following statements apply to this situation?
I. Jillian must own a European call option.
II. Jillian must own an American put option.
III. Jillian should sell her option today if she feels the price of WAN stock will decline significantly over the next two weeks.
IV. Jillian cannot profit today from the price increase in WAN stock.

• A) I and III only
• B) II and IV only
• C) I and IV only
• D) II and III only
• E) I, III, and IV only

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Definitions:

Higher Interest Rate

An increased cost of borrowing money reflected in the percentage charged on the principal amount by lenders to borrowers.

Financially Shaky Corporations

Companies that are experiencing financial instability or distress, potentially leading to increased risk for investors and creditors.

Financial Intermediaries

Institutions that act as middlemen between savers and borrowers, facilitating the flow of funds in the financial system, such as banks and investment companies.

Maturity

The point in time when a financial instrument, such as a bond or loan, reaches its due date and the principal must be repaid.