Jack and Jill are house hunting. They find House A situated on a hill. They really like the house but want to continue searching the market for one more week before making their final decision to buy the house. To avoid having someone else purchase House A while they continue their house hunting, they decide to place a $2,500 deposit on House A. This deposit will apply to the purchase price if they buy House A. If they do not buy House A, they will forfeit the $2,500. Essentially, Jack and Jill have a _____ on House A.

Question

Quizplus · Accepted Answer

Jack and Jill have a real call option on House A, as they have the right, but not the obligation, to purchase the house at a later date, with the deposit acting as the premium for this option.

Jack and Jill Are House Hunting