Respond to the following statements. a. Im a conservative investor. Id much rather hold a call option
Question:
Respond to the following statements.
a. “I’m a conservative investor. I’d much rather hold a call option on a safe stock like Exxon Mobil than a volatile stock like Google.”
b. “I bought an American call option on Fava Farms stock, with an exercise price of $45 per share and three more months to maturity. Fava Farms’ stock has skyrocketed from $35 to $55 per share, but I’m afraid it will fall back below $45. I’m going to lock in my gain and exercise my call right now.”
Step by Step Answer:
a All investors however riskaverse should value more ...View the full answer
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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