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Answer on Economics of Enterprise Question for LaMarcus Streeter

Question #6210

3. Which of the following statements is CORRECT?

a. An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.
b. As the stock’s price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
c. Issuing options provides companies with a low cost method of raising capital.
d. The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
e. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.

Expert's answer

Issuing options provides companies with a low cost method of raising

The most common way to trade options is via
standardized options contracts that are listed by various futures and options exchanges. [16] Listings and prices are tracked
and can be looked up byticker symbol. By publishing continuous,
live markets for option prices, an exchange enables independent parties to
engage in price discovery and execute transactions.
As an intermediary to both sides of the transaction, the benefits the exchange
provides to the transaction include:

  • fulfillment of the contract is backed by the credit of
    the exchange, which typically has the highest rating (AAA),

  • counterparties remain anonymous,
  • enforcement of market regulation to ensure fairness
    and transparency, and

  • maintenance of orderly markets, especially during fast
    trading conditions.


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