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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?