Consider Two Call Options Written on Different Stocks

question 53

Multiple Choice

Consider two call options written on different stocks. Both call options have a strike price of $15 and expire one year from today. The first option is written on HearFour, Inc., whose current stock price is $16. One year from now, shares of HearFour will either rise to $18 or fall to $14. The second option is written on EsoOne, Inc., whose current stock price is also $16. One year from now shares of EsoOne Inc. will either rise to $22, or fall to $0. The risk-free interest rate is 0 percent. Which call option is worth more?

• A) The call option on HearFour, is worth more.
• B) The call option on EsoOne is worth more.
• C) They are both worth the same amount.
• D) There is not enough information to make a comparison.

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Definitions:

Direct Labor

The cost of wages for employees who are directly involved in producing goods or providing services.

Direct Materials Inventory

Raw materials that are directly traceable to the manufacturing of products and are considered part of the inventory assets on the balance sheet.

Direct Materials Budget

A financial plan that estimates the raw materials needed for production and their expected costs.

Cost per Pound

A measurement of the cost to produce, acquire, or create one pound of a product or material.