Correct Answer:
B. Stock price and exercise price
An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price (exercise price) on or before a certain date (expiration date). The value of an option changes over its life.
- B: Stock price and exercise price is the correct answer. At the exact moment of expiration, an option's value is solely its intrinsic value. This intrinsic value is determined by the difference between the underlying asset's current market price (stock price) and the option's predetermined exercise price. For a call option, the value is the greater of (stock price - exercise price) or zero. For a put option, it's the greater of (exercise price - stock price) or zero. All other factors that contribute to an option's value before expiration, such as time value, volatility, and interest rates, diminish to zero at expiration.
- A: Volatility and interest rate are crucial factors in determining an option's extrinsic value (time value) *before* expiration, but they have no direct impact on its value *at* expiration.
- C: Interest rate and stock price – While stock price is correct, the interest rate does not influence an option's value at expiration.
- D: Exercise price and volatility – While exercise price is correct, volatility does not influence an option's value at expiration.