$1.$ Options What is a call option? A put option? Under what circumstances might you want to buy

each? Which one has greater potential profit? Why?

$2.$ Options Complete the following sentence for each of these investors:

$1.$ A buyer of call options.

$2.$ A buyer of put options.

$3.$ A seller $($writer$)$ of call options.

$4.$ A seller $($writer$)$ of put options.

$$The $($buyer$/$seller$)$ of a $($put$/$call$)$ option $($pays$/$receives$)$ money for the $($right$/$obligation$)$ to

$($buy$/$sell$)$ a specified asset at a fixed price for a fixed length of time.$$

$3.$ American and European Options What is the difference between an American option and a

European option?

$4.$ Intrinsic Value What is the intrinsic value of a call option? Of a put option? How do we

interpret these values?

$5.$ Option Pricing You notice that shares of stock in the Patel Corporation are going for $$50$ per

share. Call options with an exercise price of $$35$ per share are selling for $$10.$ What$$s wrong here?

Describe how you can take advantage of this mispricing if the option expires today.

$6.$ Options and Stock Risk If the risk of a stock increases, what is likely to happen to the price

of call options on the stock? To the price of put options? Why?

$7.$ Option Risk True or false: The unsystematic risk of a share of stock is irrelevant for valuing

the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option

on the stock. Explain.

$8.$ Option Pricing Suppose a certain stock currently sells for $$30$ per share. If a put option and a

call option are available with $$30$ exercise prices, which do you think will sell for more? Explain.

$9.$ Option Price and Interest Rates Suppose the interest rate on T$-$bills suddenly and

unexpectedly rises. All other things being the same, what is the impact on call option values? On

put option values?

$10.$ Contingent Liabilities When you take out an ordinary student loan, it is usually the case that

whoever holds that loan is given a guarantee by the U$.$S$.$ government, meaning that the

government will make up any payments you skip. This is just one example of the many loan

guarantees made by the U$.$S$.$ government. Such guarantees don$$t show up in calculations of

government spending or in official deficit figures. Why not? Should they show up$?$