In 2003, a company employee received an option to purchase the company's stock at $45 per share. If the stock is trading at $40 in 2005, the employee will most likely A. exercise the option, receiving a gain of $5 B.exercise the option, receiving a gain of $40 C. hold on to the option, hoping the stock price will increase in the future
See the first Related Question below. Read carefully. Then let us know what you think.
To determine the most likely course of action for the employee, let's evaluate the situation.
The employee received an option to purchase the company's stock at $45 per share, meaning they have the right, but not the obligation, to buy the stock at that price. In 2005, the stock is trading at $40 per share, which is lower than the option price.
Option A involves exercising the option and receiving a gain of $5. To exercise the option, the employee would buy the stock at the option price of $45 per share and immediately sell it at the current market price of $40 per share. This would result in a loss of $5 per share, not a gain.
Option B suggests exercising the option and receiving a gain of $40. Since the stock is trading at $40 per share in 2005 and the option allows the employee to buy it at $45 per share, exercising the option would actually result in a loss of $5 per share. Thus, option B is incorrect.
Option C suggests holding on to the option, hoping the stock price will increase in the future. This is the most likely course of action for the employee. Since the stock is trading lower than the option price, it doesn't make sense to exercise the option and incur a loss. By holding on to the option, the employee retains the possibility of buying the stock at $45 per share if the stock price increases in the future.
In conclusion, the most likely course of action for the employee in this scenario is to hold on to the option, hoping for the stock price to increase in the future (option C).