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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

c. Issuing options provides companies with a low cost method of raising
capital.
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,counter parties 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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