Allman,Inc. ,enters into a call option contract with Betts Investment Co.on January 2,2014.This contract gives Allman the option to purchase 1,000 shares of Upmann stock at $100 per share.The option expires on April 30,2014.Upmann shares are trading at $100 per share on January 2,2014,at which time Allman pays $200 for the call option.
-Using the information above,the 1,000 shares of Upmann 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 Upmann stock in this contract is referred to as the notional amount, which is the underlying asset on which the option contract is based. The option premium refers to the price paid for the option contract, and the derivative is a broader term that encompasses various financial instruments based on underlying assets. Collateral refers to assets or securities that are pledged as security for a loan or a financial obligation.