The exercise price on one of ORNE Corporations call options is $35 and

QUESTION

The exercise price on one of ORNE
Corporations call options is $35 and the price of the underlying stock is $34.
The option will expire in 55 days. The option is currently selling for $0.25.
a. Calculate the options exercise value?
b. Calculate the value of the premium over and above the exercise
value? What does this value represent?
c. Is this an out-of-the money option, at-the-money, or
in-the-money? Why?
d. What will happen to the value of the option if the underlying
stock price changes to $34.50? Why?
e. If this were a put option, would it have a greater or lesser
value than the call option? Why?
Basic Concept: A call option gives a gain when the price of stock is higher than the strike price on the day of expiry. a.] Exercise value is the the value of an option if it was exercised today (before the expiration date). For a call option, the difference between the current asset price and the stike price is the exercise value. Since the current price of stock is less than the strike price, Exercise Value of the option is 0. b] Since the option is selling for $0.25 and exercise value is 0. The value of premium over and above the exercise value is 0.25-0 = $0.25. The value of premium over and above the exercise value is $0.25 c] Since the current stock price is less than the strike price of the¦

l option, The option is Out-of-the-money . d] If the stock price goes to $34.50, the value of the option will increase . This is because it moves closer to its strike price and becomes closer to being in-the-money. The intrinsic value of the option increases e] If this was a put option, it would have a greater value than a call option because then the option would already have been in-the-money and exercising the option today also would have given a gain of 35-34 = $1.

ANSWER:

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