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QUESTION
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 opti
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?
