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1. Define each of the following terms:
Call option
Put option
Strike price or exercise price
Expiration date
Exercise value
Option price
Time value
Writing an option
Covered option
Naked option
In-the-money call
Out-of-the-money call
LEAPS
2. The current price of a stock is $50. In 1 year, the price will be either $65 or $35. The annual risk-free rate is 10
%. Find the price of a call option on the stock that has an exercise price of $55 and that expires in 1 year. (Hint: Use daily compounding.)
3. The exercise price on one of Chrisardan Company’s call options is $20, its exercise value is $27, and its time value is $8. What are the option’s market value and the price of the stock?