What Happens to an Option If the Underlying Stock Has

question 35

Multiple Choice

What happens to an option if the underlying stock has a 3-for-1 split?

• A) There is no change in either the exercise price or in the number of options held.
• B) The exercise price will adjust through normal market movements; the number of options will remain the same.
• C) The exercise price would become one-third of what it was, and the number of options held would triple.
• D) The exercise price would triple, and the number of options held would triple.
• E) There is no standard rule-each corporation has its own policy.

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Definitions:

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums.

Variable Costs

Costs that change in proportion to the level of goods or services that a business produces.

Profit

The financial gain realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity.

Variable Cost

A cost that depends on the level of production chosen.