The current market value of a stock option contract to purchase 1,000 shares of IBM stock at a price of $100 that can be exercised five years from now would
A) increase if the expected future price of IBM stock rose.
B) increase if the expected future price of IBM stock fell.
C) decrease if the expected future price of IBM stock rose.
D) remain unchanged regardless of the expected future price of IBM stock.

Question

Quizplus · Accepted Answer

The current market value of a stock option contract to purchase IBM stock at a price of $100 in five years will increase if the expected future price of IBM stock rises, as this increases the likelihood that the option will be in the money (i.e. the stock price is higher than the strike price) at the time of exercise. This increases the potential profit for the investor holding the option, leading to an increase in market value.

The Current Market Value of a Stock Option Contract to Purchase