Question 1. (15 points) The exercise price on one of ORNE Corporation\'s put opt

Question

Question 1. (15 points) The exercise price on one of ORNE Corporation's put options is $30 and the price of the underlying stock is $25. The option will expire in 25 days. The option is currently selling for $5.50. a. Calculate the option's exercise value?

b. Calculate the value of the premium over and above the exercise value? Why would an investor pay more than the exercise value for the option.

c. Is this an out-of-the money option, at-the-money, or in-the-money? Why

d. What will happen to the market price of the option if the underlying stock price changes to $24? Will the exercise value and time value change? Explain.

e. Would the value of the option likely be higher, lower, or the same if the option had 60 days to expiration instead of 25? Why?

Explanation / Answer

1)Calculation of Options Exercise value :

                           Strike price = $30

                 Less: Current price = ($25)

                        Exercise value = $5

2) Calculation of Value of premium paid over and above exercise value and Why ??

                       Premium paid = $5.50

              Less: Exercise value = $5.00

                       Excess paid    = $0.50

                         Since the buyer of put option Expects that Stock price will fall more in this 25 days.So that exercise value will be increased.

3) Presently this is in the money , Because the buyer has already paid premium if dont exercise the option his loss would be $5.50,However if he exercises the option his loss would be reduced. So that he should exercise the option.

4) If Stock price changes to $24 :

                       Strike price = $30

          Less: Current price    = ($24)

                    Exercise value = $6

              So that if stock price changes to $24,exercise price will increase,automatically time value also increases.

5) By comparing the price of $24 in 25days , The stock price was showing down trend.So that it expects to be more lower in the coming period.however no body can predict the stock price exactly.Some times it rises unexpectedly and some times it falls.So that it is expected to fall in coming period only just because it was shown a falling trend for 25 days.

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