By now your head may be spinning with all the terms and concepts introduced. It is therefore a good time to take stock of what you should know.

1 Define a call option and a put option.
2 What is the basic difference between European and American call options?
3 Options are available on what types of asset?
4 In relation to the information on traded options in Table 12.1, explain why the following features were observed:

(a) the lower the exercise price, the higher the value of a call;

(b) the greater the time to maturity, the higher the price of a call; and

(c) the price paid for calls exceeds the gross profit that could be made by immediately exercising the call.