Yvonne offered to sell Tracy several pieces of rare Italian art at a very good p
ID: 367568 • Letter: Y
Question
Yvonne offered to sell Tracy several pieces of rare Italian art at a very good price because they were duplicates in her own collection. Tracy could not accept the offer at that time, but she did give Yvonne $500 in return for her promise to keep her offer open for three weeks. Tracy returned with the agreed upon balance two weeks later to find that Yvonne already had sold the pieces she had offered to sell to her. Yvonne explained that she had been able to get a better price from another buyer. She offered to return Tracy’s $500 and insisted that this was all she was obligated to do. Is Yvonne right?
Explanation / Answer
No Yvonne is not right. this deal is an example of "call option" where buyer of the option has a right to buy the underlying assets at an agreed price on or before a particular date by paying a premium over the price of the assets it further creates an obligation of the seller of the option to sell the underlying, if buyer wish to . for this obligation the seller gets the premium over and above the price of the assets. in this exmple below are the option
underlying Asset; piece of italian art (duplicate)
premium: $500
Exercise date; 3 weeks from the date of agreement
Buyer; Tracy
Seller; Yvonne
in such option if seller of the option is unable to deliver the underlying in case of option is exercised, the seller is supposed to pay some penalty over& above the premium recieved. so in above case, mike is supposed to get a lumpsum amount in the form of penalty over and above $500 paid by yvonne.
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