Future Business Leaders of America (FBLA) Marketing Practice Test

What is the underlying value of a stock option calculated against?

1. Market price

2. Dividend yield

3. Exercise price

4. Stock value

The correct answer is: Exercise price

The value of a stock option is fundamentally tied to the exercise price, also known as the strike price. This is because the exercise price is the predetermined price at which the holder of the option can buy or sell the underlying stock. When evaluating a stock option, it's critical to understand that the potential profit from exercising the option depends on the relationship between the current market price of the stock and this exercise price. If the market price of the stock rises above the exercise price, the option is "in the money," meaning it can be exercised for a profit. Conversely, if the market price is below the exercise price, the option is "out of the money," and exercising it would not be beneficial. Therefore, the exercise price serves as the baseline against which the market price is compared to determine the option's value. Understanding this relationship is vital for investors and traders, as it influences their decisions regarding whether to exercise the option or let it expire. Thus, the exercise price is crucial in assessing the value of a stock option.