Question

Suppose you buy a call option with a strike price of $105. If the price of the underlying stock at expiration is $90, which of the following is the best and correct choice? a) You should receive a payoff of -$15 by exercising the option. b) You should receive a payoff of $15 by exercising the option. c) You should receive a payoff of $15 by not exercising the option. d) You should receive a payoff of zero by not exercising the option. e) You should receive a payoff of $90 by exercising the option.

Answer 1

Correct answer: d) You should receive a payoff of zero by not exercising the option.

A Call option is a financial derivative which gives a right (not obligation) to its buyer to buy underlying assets at given exercise price(strike price) on maturity date.

Payoff of Call = Max( Stock Price on expiry - Strike price, 0)

For given Call option:

Strike price = $105

Stock price of expiry = $90

Thus,