Before Expiration, the Time Value of an Out-Of-The-Money Stock Option

question 32

Multiple Choice

Before expiration, the time value of an out-of-the-money stock option is ________.

• A) equal to the stock price minus the exercise price
• B) equal to zero
• C) negative
• D) positive

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Definitions:

Compound Leverage Factor

A measurement used to describe the magnification of risk and return caused by using borrowed money or financial derivatives within an investment.

Financial Leverage

The use of borrowed money to increase the potential return of an investment, which also increases the risk of loss.

Operating Leverage

A financial ratio that measures the proportion of fixed costs in a company's cost structure, indicating how a change in sales volume will impact operating income.

Economic Value Added

A measure of a company's financial performance based on the residual wealth calculated by subtracting a firm's cost of capital from its operating profit.