In 2018, a company employee received an option to purchase the company's stock at $45 per share. If the stock is trading at $40 a share in 2020, the employee will most likely
A) exercise the option, receiving a gain of $5.
B) exercise the option, receiving a gain of $40.
C) not bother to exercise the options.
D) buy the stock at $45 per share.
E) sell the shares to a third party slightly above the market price.

Question

Quizplus · Accepted Answer

It doesn't make sense for the employee to exercise the option since the stock is currently trading at $40 per share, below the exercise price of $45 per share. It would be more financially beneficial for the employee to not exercise the option and instead wait for the stock price to increase above $45 per share, at which point they could exercise the option and make a profit.

In 2018, a Company Employee Received an Option to Purchase