Explanation:
If the options are exercised, the net cash inflow will be ($24.69 − $22.5) × 1,000 = $2,190
The total cost of the options is $2,700, i.e., ($270 × 10)
Thus, net loss = $2,190 − $2,700 = $510
Option A is incorrect. The total cost of the options is ($270 × 10) = $2,700.
Option B is incorrect. An American call option allows holders to exercise their rights at any time before and including the expiration date.
Option C is incorrect. Since the stock price at the expiration of the option is $24.69, and the strike price is $22.5, the option is in the money, not at the money. The option would be at the money if the current stock price were equal to the strike price.
Section: Financial Markets and Products:
Chapter: Options Markets
Learning Objective: Explain the payoff function and calculate the profit and loss from an options position.
Ultimate access to all questions.
No comments yet.
Q.19 Colin Francis purchased 10 American call options to buy 1,000 shares of Thai Healthcare Corp. The cost of each option was $270. The option expires in 6 months, and the stock price at the expiration of the option is $24.69. If the contract's strike price is $22.50, which of the following statements is correct?
A
The total cost of the options is $22,500.
B
The option can only be exercised at the expiration.
C
The call option is at the money.
D
If the option is exercised, the total loss is $510.