It Is May 19 and You Own a June European

question 87

Multiple Choice

It is May 19 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:

Raw Material Purchase

The process of acquiring the basic materials needed for production of goods.

Fixed Manufacturing Overhead

Fixed manufacturing overhead costs are those production expenses that do not vary with the volume of production, such as salaries of managerial staff and rent of the factory.

Budgeted Fixed Manufacturing Overhead

The predetermined amount of fixed overhead expenses expected to be incurred in the manufacturing process.

Net Operating Income

Profit of a business after all operating expenses, excluding taxes and interest, have been deducted from total revenue.