11 Warner Motors’ stock is trading at $20 a share. Call options that expire in t

Question

11

Warner Motors’ stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

Select one:

a. The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.

b. The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.

c. The price of the call option will increase by $2.

d. The price of the call option will increase by more than $2.

e. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.

Explanation / Answer

Answer: e. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.

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