Question

Custom Kraft's stock price is $60 a share. Call options on the stock are available, some with a strike price of $50 and some with a strike price of $70. Both options expire in three months. Which of the following is correct: The options with the $50 strike price have an exercise value of $20. If the stock price rose by $10, the exercise vlaue of the options with the $50 strike price would also increase by $10. The options with the $50 strike price will sell for less than the options with the $70 stike price. The options with the $70 strike price have an exercise value greater than $0. The options with the $50 strike price will sell for exactly $10.

Answer 1

Answer - (B) (assuming A to E in descending order)

Solution

As current stock price is 60 (less than 70 and more than 50), so call option 70 will not be exercised and only call option 50 will be exercised. So exercise value for call option 70 is 0, and for call option 50 is 10 (=60-50). So, option A and D are incorrect.

So, call option 50 has more value than call option 70 and should be sold for more. Thus option C is incorrect.

Option D is incorrect as price of call option 50 can be less than 10.

Hence, correct answer is B. Because if stock price rises by 10 and reaches 70, new exercise value will be 20

(=70-50).