Suppose You Own a Put Option on a Stock with a Strike

question 31

Multiple Choice

Suppose you own a put option on a stock with a strike price of $35 that expires today. The price of the underlying stock is $25. If you purchase the stock and exercise the put option:

• A) you will earn $10.
• B) you will lose $10.
• C) you will earn $25.
• D) you will lose $25.

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Definitions:

Variable Costing

An accounting approach where only variable production costs (direct materials, direct labor, and variable manufacturing overhead) are included in product costs, with fixed overhead treated as a period expense.

Unit Product Cost

The total cost associated with producing a single unit of product, including direct materials, direct labor, and allocated overhead.

Absorption Costing

An accounting method that includes all manufacturing costs (direct labor, direct materials, and both variable and fixed manufacturing overhead) in the cost of a product.

Unit Product Cost

The total cost (both fixed and variable) incurred to produce, store, and sell one unit of a product.