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. Assume that the price per share of WSM stock is $120 on April 30, 2011, and that the time value of the option has not changed. In order to settle the option contract, Hall, Inc., would most likely
A) pay Bennett Investment $20,000.
B) purchase the shares of WSM at $100 per share and sell the shares at $120 per share to Bennett.
C) receive $20,000 from Bennett Investment.
D) receive $400 from Bennett Investment.

Question

Quizplus · Accepted Answer

Hall, Inc. would exercise the call option to buy 1,000 shares at $100 each and then sell them at the market price of $120, making a profit of $20 per share. Thus, Hall would effectively receive $20,000 from Bennett Investment as the net gain from the transaction.

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