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1.
a.
The value of the call is the stock price minus the present value of the exercise price, so:
C
0
= $55 – [$45/1.062] = $12.63
The intrinsic value is the amount by which the stock price exceeds the exercise price of the call,
so the intrinsic value is $10.
b.
The value of the call is the stock price minus the present value of the exercise price, so:
C
0
= $55 – [$35/1.062] = $22.04
The intrinsic value is the amount by which the stock price exceeds the exercise price of the call,
so the intrinsic value is $20.
c.
The value of the put option is $0 since there is no possibility that the put will finish in the
money. The intrinsic value is also $0.
3.
a.
Each contract is for 100 shares, so the total cost is:
Cost = 10(100 shares/contract)($8.05)
Cost = $8,050
b.
If the stock price at expiration is $130, the payoff is:
Payoff = 10(100)($130 – 110)
Payoff = $20,000
If the stock price at expiration is $118, the payoff is:
Payoff = 10(100)($118 – 110)
Payoff = $8,000
c.
Remembering that each contract is for 100 shares of stock, the cost is:
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 Spring '10
 Yang

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