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.

Question

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.

Quizplus · Accepted Answer

The potential true net worth of the FI would be the difference between its total assets and liabilities, plus any gains from the call options. 
Potential true net worth = Assets - Liabilities + Gains on call options.

Assets = $800 million 
Liabilities = $740 million 
Face value of call options = $50 million

If the call options turn out to be worthless, the potential true net worth would be:

Potential true net worth = $800 million - $740 million + $0 
Potential true net worth = $60 million

If the call options are exercised and result in gains of $50 million, the potential true net worth would be:

Potential true net worth = $800 million - $740 million + $50 million 
Potential true net worth = $110 million

The minimum potential true net worth, therefore, is $110 million, which is option C.

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