An FI has assets of $800 million and liabilities of $740 million. If the FI bought call options on bonds with a face value of $50 million, what is the minimum amount of the stockholder's potential true net worth?
A)$10 million.
B)$70 million.
C)$110 million.
D)$790 million.
E)$850 million.

Question

Quizplus · Accepted Answer

The minimum amount of the stockholder's potential true net worth is calculated as:
Assets - Liabilities - (Cost of call options) = Stockholder's potential true net worth
= $800 million - $740 million - (Cost of call options)
Since the face value of bonds purchased through call options is $50 million, we need to consider the cost of these options to calculate the true net worth. Assuming a 5% premium paid for call options, the cost would be $2.5 million.
Therefore,
Stockholder's potential true net worth = $800 million - $740 million - $2.5 million
= $57.5 million
This means that the minimum amount of the stockholder's potential true net worth is $57.5 million. Among the given options, the closest value to this is option C ($110 million), which is the correct answer.

An FI Has Assets of $800 Million and Liabilities of $740