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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

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?

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