Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2011. This contract gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on April 30, 2011. WSM shares are trading at $100 per share on January 2, 2011, at which time Hall pays $100 for the call option.
Using the information above, the 1,000 shares of WSM stock in this contract is referred to as the
A) collateral.
B) notional amount.
C) option premium.
D) derivative.

Question

Quizplus · Accepted Answer

The 1,000 shares of WSM stock in the contract is referred to as the notional amount because it is the amount on which the option contract is based. The option premium is the amount Hall paid for the call option, and the derivative is the type of financial instrument that the call option represents. Collateral would refer to assets pledged as security for a loan or other obligation and is not applicable in this scenario.

Hall, Inc, Enters into a Call Option Contract with Bennett Investment