10. Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share a. increases to $104. b. decreases to $90. c. increases to $106. d. decreases to $96. e. None of these is correct.

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Business

Braylon Davenport

1 February, 06:34

10. Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share a. increases to $104. b. decreases to $90. c. increases to $106. d. decreases to $96. e. None of these is correct.

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Arabella Cervantes · Answer 1

The answer is C.

Explanation:

Call option is a financial contract that gives the holder (holder of call option) the right but not the obligation to buy an asset (bond, equity etc.). The holder of call option expects the underlying assets to increase in future.

The excercise price or strike price is $100

The premium (the price paid by the buyer to the seller to obtain this right) is $5

The total is $105 ($100 + $5)

So for profit to be recorded, this must be over $105 which is from $106.