Consider a One-Year, At-The-Money Call Option on Taggart Stock

question 16

Multiple Choice

Consider a one-year, at-the-money call option on Taggart stock. The effect on the price of this call option of an increase in the volatility from 25% to 40% is closest to:

• A) $0.70 increase
• B) $1.70 decrease
• C) $2.30 increase
• D) $2.80 increase

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Definitions:

Multiple-Step

An income statement format that separates operating revenues and expenses from non-operating ones to calculate net income.

Operating Expenses

Costs associated with the daily operations of a business, excluding cost of goods sold, directly related to generating revenue.

Nonoperating Activities

Nonoperating activities involve the revenues and expenses that are not related to the core operations of a business.

Gross Profit Rate

The ratio of gross profit to net sales, expressing the percentage of revenue that exceeds the cost of goods sold.