Financial Risk Manager Part 1

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Explanation:

Correct answer: C

Compute the profit from each strategy when the stock rises from $20 to $40.

With $10,000 and a stock price of $20, Peter buys:

10{,}000 / 20 = 500 \text{ shares}

If the stock rises to $40, the profit is:

(40 - 20) \times 500 = 10{,}000

Each call costs $2.50, so Peter buys:

10{,}000 / 2.50 = 4{,}000 \text{ options}

At expiration, each option has intrinsic value:

40 - 20 = 20

Total payoff:

20 \times 4{,}000 = 80{,}000

Profit on the options position:

80{,}000 - 10{,}000 = 70{,}000

Stock profit : option profit =

10{,}000 : 70{,}000 = 1 : 7

So the ratio is equivalently 7.0 : 1.0 in favor of the option strategy, which matches C.

Explanation:

Correct answer: C

Compute the profit from each strategy when the stock rises from $20 to $40.

With $10,000 and a stock price of $20, Peter buys:

10{,}000 / 20 = 500 \text{ shares}

If the stock rises to $40, the profit is:

(40 - 20) \times 500 = 10{,}000

Each call costs $2.50, so Peter buys:

10{,}000 / 2.50 = 4{,}000 \text{ options}

At expiration, each option has intrinsic value:

40 - 20 = 20

Total payoff:

20 \times 4{,}000 = 80{,}000

Profit on the options position:

80{,}000 - 10{,}000 = 70{,}000

Stock profit : option profit =

10{,}000 : 70{,}000 = 1 : 7

So the ratio is equivalently 7.0 : 1.0 in favor of the option strategy, which matches C.

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MManit

Last updated: April 18, 2026 at 11:32

1.0: 1.0; i.e., no leverage

33.3%

2.5: 1.0

33.3%

7.0: 1.0

16.7%

20.0: 1.0

16.7%